Credit Unions: Definition, Membership Requirements, and Comparison to Banks

Credit unions are financial cooperatives that offer their members standard banking services. Credit unions offer fewer items than regular banks but provide customers with cheaper rates and more ATM locations.

A credit union is a financial cooperative that offers standard banking services. Credit Unions can be founded by major firms, organizations, and other entities for their employees and members, and can range in size from small, volunteer-only operations to large enterprises with thousands of participants across the country.

Credit unions are formed, owned, and run by their members. As such, they are not-for-profit, tax-exempt organizations.

The Key Takeaways

• Credit unions are financial cooperatives that offer their members standard banking services.
• Credit unions offer fewer products than traditional banks, but they do provide clients with higher rates and more ATM locations.
• They can do so since they are not publicly traded and just need to produce enough money to cover their day-to-day expenses.
• However, credit unions have fewer physical facilities than most banks, which might be a disadvantage for clients who want in-person assistance.
• Credit unions are not required to pay corporate income tax on their earnings.

Understanding a Credit Union

A credit union is a non-profit financial institution owned by the individuals who use its services. Credit union members have access to the same products and services as regular bank customers, such as credit cards, checking and savings accounts, and loans.

Requirements for Membership

Membership in a credit union was originally restricted to persons who shared a mutual bond. They may have worked for the same company or in the same industry. Or they could have lived in the same neighborhood.

Credit unions, on the other hand, have relaxed membership requirements and frequently enable the general public to join.

To do business with a credit union, you must first join by creating an account (typically for a small fee). You immediately become a member and a partial owner.

That signifies you are involved in the affairs of the union. You have the right to vote on the board of directors and union decisions. A member’s voting power is not determined by the amount of money in their account; each member has an equal vote.

Membership in federally insured credit unions increased to 136.6 million as of March 31, 2023, according to the National Credit Union Administration (NCUA).

Advantages of Credit Unions vs. Banks

There are two advantages these are:

• Non-Profit Status

• Better Rates and Fees

1. Non-Profit Status

Credit unions, like banks, begin their earning process by attracting deposits. Credit unions have two major benefits over banks in this regard, both of which stem from their nonprofit status:

• Credit union earnings are excluded from corporate income tax.
• Credit unions just need to earn enough money to cover their daily expenses. As a result, they can function with lower operating margins than banks, which are required to grow earnings every quarter by shareholders.

2. Better Rates and Fees

Credit union revenues are used to pay members better interest rates on deposits and lower fees for services such as checking accounts and ATM withdrawals. To summarize, a credit union can help members save money on loans, deposit accounts, and savings products.

According to NCUA data as of March 31, 2023, the nationwide average rate for five-year certificates of deposit (CDs) given by credit unions was 2.66%, while banks offered an average rate of 1.83%.

Credit union money market rates were also higher, with an average rate of 0.53% vs 0.43% at banks.

While these distinctions may appear minor, they add up to give credit unions a major advantage over banks when vying for deposits.

Disadvantages of Credit Unions vs. Banks

There are four disadvantages these are:

• Fewer Locations

• Lower Tech

• Limited Products and Services

• Less Flexibility

1. Fewer Locations

Credit unions have fewer physical facilities than other banks, which might be a disadvantage for customers who want in-person assistance. Most provide modern services such as online banking and automatic bill payment. Nonetheless, the tiny size of many credit unions can represent a trade-off in accessibility.

2. Lower Tech

Because smaller credit unions do not have the same technology budget as banks, their websites, and security measures are sometimes far less modern. Nonetheless, some mid-sized and larger credit unions may provide mobile banking apps that compete with those of much larger, for-profit banks.

3. Limited Products and Services

While credit unions supply the majority of the financial goods and services that banks do, they frequently offer fewer options. Bank of America offers 20 credit card alternatives, ranging from rewards cards to student cards, whereas Navy Federal Credit Union (NFCU) offers only six.

The State Employees’ Credit Union (SECU), the country’s second-largest credit union, offers one credit card.

4. Less Flexibility

Banks are keeping later and longer hours as they commit more resources to customer service and people. On weekdays, they may be open until 5 p.m. or 6 p.m., and they are frequently open on Saturdays as well. Credit unions typically keep regular banking hours (9 a.m. to 3 p.m., Monday through Friday), however, larger ones, such as SECU, operate a 24-hour customer care hotline.

Insurance on Credit Union Accounts

Credit unions are not insured by the Federal Deposit Insurance Corporation (FDIC). The NCUA, which was created in 1934 and governs federally chartered credit unions as well as the majority of state-chartered credit unions, does provide account protection.

Indeed, one of the NCUA’s primary duties is to oversee the National Credit Union Share Insurance Fund (NCUSIF), which uses government funds to back up shares (deposits) in all federal credit unions.

The NCUA provides up to $250,000 in coverage for each person account, joint account, trust account, retirement account (such as regular IRAs, Roth IRAs, or Keogh plan accounts), and business account.

For example, if you have a credit union and have an individual account, a Roth IRA, and a business account, your total shares are covered up to $750,000.

The NCUA website allows you to study credit unions of interest that the NCUA governs.

What is the definition of a credit union?

A credit union is a self-help cooperative in which members pool their savings to give low-interest credit to one another. To be a member of a credit union, you must share a common bond with the other members. You all have something in common, such as living or working in the same area.

What is the difference between a credit card and a credit union?

Credit unions are non-profit organizations that allow members to borrow at low-interest rates from pooled deposits. Major credit card issuers, on the other hand, are for-profit institutions that must always make choices with their investors in mind.

What Benefits Do Credit Unions Offer?

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