How Credit Unions Work

What does it Mean to Use a Credit Union?

Credit union building with sign
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A credit union is a financial institution similar to a bank. Credit unions offer many of the same products as banks – at competitive rates – but they have a different ownership structure.

If you're interested in using a credit union, find out what you can expect in terms of safety and service and what makes them different from banks.

What Products and Services do Credit Unions Offer?

Just like banks, a credit union gets money from its customers and lends that money out to other customers (although it can get more complicated than that).

Credit unions typically offer the same products and services as larger banks, including:

  • Checking accounts
  • Savings accounts
  • Loans (auto, home, and personal loans)
  • Certificates of deposit (CDs)

If you work with a credit union, there's a good chance that you can get everything you'd need and expect from a bank.

However, some credit unions - especially smaller ones – will choose not to offer every variation of every product out there. The reason is that these credit unions do not do the same amount of volume that larger banks do. Larger institutions can afford to have “loss-leaders” or products that get customers in the door. Credit unions will more likely only offer the products and services that a large portion of the membership is likely to use.

Although you'll find many of the same products, they might go by different names at a credit union. Savings accounts are called "share savings accounts", and checking accounts might go by "share draft" accounts.

How Competitive are Credit Unions?

Small credit unions give the big banks a run for their money. Because credit unions tend to focus on service over profitability, the rates can be better at a credit union. If you are a rate shopper, you may not find the attractive CD sales as often. However, a long-term relationship with a good credit union can work out well.

The same is true for a long-term relationship with a good community bank.

Occasionally you'll find a credit union that does not offer the whole universe of products and services that larger banks offer. If you happen to want those particular services, you might be happier with a megabank that offers one-stop-shopping.

One of the best features of using (most) credit unions is shared branching. If your credit union is part of the shared branching network, you can use other branch locations - even if you don't belong to those credit unions - around the country (often for free). Learn more about how shared branching works.

Is Your Money Safe at a Credit Union?

Credit union deposits are insured very much like your bank deposits. The organization that insures the two types of institutions is different. However, as long as you use a federally insured credit union, the quality of insurance is the same – it is backed by the full faith and credit of the US government.

If your credit union is not federally insured, you still might be protected and your money might be safe, but NCUSIF insurance is best. For more information, read about credit union safety.

Who Owns a Credit Union?

A credit union is an institution owned by the customers – who are called "members." Contrast this with banks where the customers are just customers. Banks answer to profitability – they are usually owned by shareholders who expect growth and increasing profits. There are only two ways for a bank to accomplish that: cut costs or increase revenues (and sometimes they do that by charging fees or paying customers less).

Credit unions are nonprofit organizations that often strive for service over profitability. Note that this does not mean they are charities. Credit unions must make sound financial decisions, collect revenue, pay salaries, and compete with other institutions. Some credit unions are very bank-like in their offerings (including the level of fees and interest rates) so be sure to compare options before you open an account anywhere.

Who Runs a Credit Union?

If all the customers own the credit union, then who has time to run the place? Credit unions actually have the same types of personnel as banks. Upper management consists of a board of directors who makes decisions on credit union operations. This board is composed of elected volunteers. They don’t do it for pay – they’re credit union members who want a say in how the place is run.

Who Can be a Credit Union Member?

So, what does it take to be a member of a credit union? It depends on the credit union. Credit unions are required to limit their offerings to people who have a common bond. This bond may be the geographic community, a workplace, a religion, or other type of bond.

Credit unions cannot simply offer their services to anybody who has a pulse. If a credit union fails to limit membership in this way, they risk losing their status as a credit union.

What does it Mean to be a Member?

As a credit union member, you have a say in how the credit union is run. You don't have to be an active member, but you have the opportunity to participate if you want to. Credit unions typically have annual meetings that you're invited to, and your vote helps to decide who runs the credit union (among other things). Each member is treated equally and gets one vote – you don't get more votes for having more money in the credit union.

Now that you know all about credit unions, learn how to find a credit union and how to switch your bank accounts to a new institution.

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