The Balance’s Guide to Credit Unions
Frequently Asked Questions
What is a credit union?
A credit union is a not-for-profit banking and financial services organization. It exists to serve its members’ banking needs. Just like a bank, a credit union offers savings accounts, checking accounts, auto and personal loans, and a wide array of other financial services. Because a credit union is member-owned and member-focused, it can usually offer better rates and terms than a traditional, for-profit bank can.
What is the difference between a credit union and a bank?
The two key differences between banks and credit unions are membership requirements and profit requirements. Banks serve the general public while credit unions serve their members. Banks are profit-seeking, while credit unions are not. These two differences affect how each delivers financial products and services. Banks generally provide a broader array of services (from deposit accounts to investment services), while credit unions offer better rates on deposit accounts and for consumer loans.
How to join a credit union?
Credit union membership can be a perceived stumbling block for some, but most credit unions make the process as easy as possible. Contact the credit union you’d like to join and ask. Often membership requires affiliation with a group, charity, or occupation. Or the requirement may only be that you reside in a particular region. After you’ve determined eligibility, you’ll be asked to make a deposit and open a share account.
What is a credit union share-secured loan?
A share-secured loan is a type of secured loan meant to help borrowers improve their credit histories and scores. The way it works is you deposit a fixed amount of money with the credit union. The credit union then funds the loan. As with a standard loan, you will make payments that the credit union will report to the credit bureaus. Your on-time payments will improve your credit. Along the way your deposit will earn interest.
What financial products do credit unions offer?
Credit unions provide all the familiar consumer banking products and services: savings and checking accounts; certificates of deposit; home loans and refinances; personal and auto loans. Credit union members can also expect money transfers, mobile banking, direct deposit, and other convenient banking services.
Annual Percentage Yield (APY)
Annual percentage yield is the annual percentage of profit earned on an investment, which takes into account the effect of compounding interest.
A share account is a savings or checking account at a credit union. Share savings accounts pay variable dividends, the equivalent of a bank account's interest. Share checking accounts, called "draft accounts," are liquid and meant for payments and everyday spending.
A debit card allows users to make payments directly from their bank accounts using credit card networks instead of paper checks.
A credit score is a number that evaluates and rates your creditworthiness based on your credit history. Lenders use credit scores to decide whether to approve someone for a loan or credit card and to determine what interest rate to charge.
The National Credit Union Share Insurance Fund (NCUSIF) is a government-backed insurance fund for credit union deposits. Like FDIC insurance, NCUSIF covers up to $250,000 per account holder per institution.
A dividend is interest paid on members’ shares in the credit union. Essentially, this is the interest paid on savings and other accounts.
Some credit unions refer to certificates of deposit (CDs) as share certificates. A CD is a type of savings vehicle in which a fixed sum of money is held for a fixed period of time, during which it earns a fixed amount of interest. At the end of the period (the “maturity date”), you can reclaim your money or roll it over into another share certificate.
Maximum Loan Amount
A maximum loan amount is the total amount of money a lender will approve for a borrower. Maximum loan limits can apply to mortgages, personal loans, lines of credit, and credit cards.
Unsecured loans are loans that are approved without the need for collateral. If a borrower defaults on the loan, the lender is left with few options to get paid outside of filing a lawsuit.
Collateral represents some type of property that you own that you offer as security in order to obtain a loan. The item you offer should have value, and it is something the lender can repossess if you don’t make payments.
Line of Credit
A credit line, also known as a line of credit (LOC), is a type of standing loan that allows individuals, businesses, or other organizations to borrow cash when they need it, repay what they have borrowed, and continue borrowing without applying for a new loan.
Annual Percentage Rate (APR)
An annual percentage rate (APR) is the interest rate you pay each year on a loan, credit card, or other line of credit. It’s represented as a percentage of the total balance you have to pay.