How Credit Unions Work

Checking, Savings, and Loans at Member-Owned Institutions

Credit union building with sign
Steve Shepard / Getty Images

Credit unions are not-for-profit organizations that provide financial services to their members. If you need to save money, pay bills, or get a loan, a credit union is an option for those services.

How Banks and Credit Unions Differ

If you’re familiar with banks, credit unions are similar: They offer many of the same products and services as banks, and the experience of using those services is roughly the same.

Ownership is the main difference between banks and credit unions. Credit unions are member-owned (customers at credit unions are called “members,” so the customers own the credit union). Banks are owned by investors, who might not be accountholders or community members. When you open an account at a credit union — no matter how small — you become a partial owner of the institution. All members have the right to vote for credit union leadership (the board of directors).

Taxation is another difference. As a not-for-profit organization, a credit union doesn’t pay the same taxes that banks pay. However, credit unions are not charities. They must make sound financial decisions, collect revenue, pay salaries, and compete with other institutions.

When it comes to the safety of your deposits and basic services, banks and credit unions are very similar (see below).

Highlights of Credit Unions

Credit unions are popular with their members, some of whom are fiercely loyal to their institutions.

Rates and fees are often (but not always) attractive at credit unions. Because the institution is member-owned, there is typically less pressure to maximize profits for outside investors. That said, some credit unions use rate and fee schedules similar to (or more expensive than) big banks, so it’s always worth comparing before choosing an institution.

Community is traditionally an important feature of credit unions. To join a credit union, you need to qualify by sharing a common bond with other credit union members. Again, this promotes affordable loans and competitive interest rates because you’re all in the same boat. Credit unions also play an important part in local economies.

Shared branching is a service that is unique to credit unions. Because credit unions are often local institutions, you can’t find a branch or ATM when you move away or travel (even if you go across town). However, in many cases, it’s possible to use branches and ATMs of other credit unions — for free. You can make deposits and withdrawals, pay loans, and more. To use shared branching, both your home credit union and the branch you intend to use need to be part of the shared branching network.

Personal service might be available at small local credit unions. If you value building relationships and talking to the same tellers and loan officers, a credit union or community bank is the best place to find that experience. When you have the chance to talk to decision makers, you may find that it’s possible to get approved for loans and other services that big banks would not offer you.

It’s not that credit unions are reckless — they just have the ability to get to know you and understand the risks instead of simply rejecting you.

What Can you Do at a Credit Union?

Credit unions provide financial services to consumers, businesses, and other organizations. The most common offerings are described here, but every credit union is different.

Savings accounts provide a safe place to keep cash and earn interest on your savings. At a credit union, savings accounts are called share accounts because you — like all other customers — are a partial owner of the credit union. Certain transfers out of a savings account are limited to six per month.

Checking accounts allow you to spend your money without monthly limits on payments. There are several ways to access your cash:

  1. Debit card: Most credit unions provide a free debit card for making purchases online and in person (you can also use the card to withdraw cash at an ATM).
  1. Online bill payment: Pay your regular bills or any other expenses by setting up a payment online. The credit union will print and mail a check or send funds electronically.
  2. Write a check: Checks may be old-fashioned, but they’re still a useful and inexpensive way to pay.
  3. Pay cash: You can always get cash from a teller or ATM and spend with paper currency.

Certificates of deposit (CDs) are like super-powered savings accounts. CDs pay more than regular savings, but there’s a catch: you need to commit to leaving your money in the CD for a specified amount of time (often one to three years). If you prefer flexibility, some institutions offer money market accounts, which pay similar interest rates and allow you to access your funds throughout the month.

Loans are available for a variety of uses. Credit unions use the money that other customers deposit to fund loans for borrowers.

  • Home loans (mortgages) provide funds to buy a home. Second mortgages and home equity lines of credit (HELOCs) allow you to use the equity in a property that you already own.
  • Auto loans might be one of the most popular loans from credit unions. Rates are often competitive, and credit unions might have relationships with local automobile dealers.
  • Personal loans can be used for almost anything you want. Also known as “signature loans” at credit unions, these loans are approved based only on your credit scores and income.
  • Credit cards are revolving lines of credit that allow you to borrow and repay repeatedly — as long as you don’t go over your credit limit.

Other services are also available from credit unions. At most credit unions, you can get the following:

  • Official checks like cashier’s checks or certified checks. There’s typically a small fee, but you should only need these items for the occasional down payment or other life events.
  • Money orders are similar to cashier’s checks, and they are useful when a personal check is not appropriate (but you don’t need a cashier’s check).
  • Safe deposit boxes are a safe place to keep important documents and small valuables. Your items are stored behind several locks, but you’ll need to retrieve anything you need during banking hours.
  • Notary services can be helpful when you need to prove that a signature is valid on official documents.  A credit union employee (who must also be a notary public) can place an official stamp on your documents and record the time and date of your signature.

The actual products and services available to you will vary from credit union to credit union. Larger credit unions typically offer a broader variety, while small credit unions might keep offerings minimal. But you might be surprised — even the smallest credit unions can contract with other organizations to meet your demands. Call your local credit union and ask about services, fees, and technology options (like apps) as you evaluate the alternatives.

Eligibility: Joining a Credit Union

To become a member of any credit union, you need to “qualify” or be eligible to join. Qualifying is usually easy, but it is still a requirement because of the credit union structure and federal law.

Credit unions are designed to serve individuals and organizations that share a common bond, and people who meet the criteria are known as the field of membership. You can qualify in a number of ways:

  • Your job: Your employer might sponsor a credit union or have relationships with credit unions in your area, so you’d have the ability to join those credit unions. Some careers also qualify you to be part of a credit union (so your individual employer doesn’t matter — your occupation gets you in).
  • Your location: Some credit unions are open to anybody who lives or works in a geographic area. For example, you could qualify simply because you live in a particular city or county. Even going to school or worshiping in an area you don’t live in can result in eligibility.
  • Group memberships: Being a member of certain groups can make you eligible for certain credit unions. Some groups are open to the public, and you can join those groups for the purpose of becoming a credit union member. Other groups (like a homeowner’s association) require that you meet other criteria.
  • Your family: If a member of your family is a credit union member, you can most likely join that credit union based on your relative’s eligibility.

For a listing of credit unions in your area (along with a description of the eligibility requirements), try searching with your zip code at CULookup.com.

How to Join a Credit Union

Once you find an institution that you like (and that you’re eligible to join), becoming a member is as easy as opening an account. The process is the same as opening a savings account at any bank or credit union: you’ll need to provide information about yourself, bring identification, and make an initial deposit (often $25 or less). Learn more about requirements to open savings and checking accounts.

All credit union customers need to open a basic share (or savings) account. Even if you’re only joining the credit union to get a loan, you’ll need to become a member — which requires that you have a “share” of the credit union. In many cases, you’ll simply deposit as little as five dollars into a share account to qualify for the loan, and you’ll just let that money sit indefinitely.

Is Your Money Safe at a Credit Union?

Credit union deposits are insured very much like your bank deposits. The organization that protects your money depends on the type of institution you use. Federally insured credit unions use the National Credit Union Share Insurance Fund (NCUSIF), which is a government-backed fund. At banks, insurance comes from the Federal Deposit Insurance Corporation (FDIC). At federally insured credit unions, the quality of insurance is the same as FDIC insurance — it is backed by the full faith and credit of the US government. Both forms of insurance cover up to $250,000 per account holder per institution (it is possible to insure more than $250,000 in one credit union under certain conditions).

If your credit union is not federally insured, you still might be protected under a private insurance policy, and your money might be safe, but NCUSIF insurance is best because of the government guarantee.

Who Runs a Credit Union?

If all of the customers own a credit union, who is in charge?

Credit unions have a variety of staff, including branch tellers and loan officers, administrative and operations roles, and executives.  Upper management consists of a board of directors that makes decisions on credit union strategies, policies, and more. 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.

Credit union members vote for the board of directors. Each member gets one vote, so all members have equal power (members with more money in the credit union don’t get more votes than members who have less).

Are Credit Unions Competitive?

Small credit unions give 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 chaser, you may not see the highest rates offered at online banks. However, a long-term relationship with a good credit union can work out well, and the benefit of a higher rate is only as great as your account balance.

The same goes for relationships with good community banks.

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 or a larger credit union.

As free checking faded away from big bank offerings, credit unions have gained popularity. The Credit Union National Association (CUNA) reports that 76 percent of credit unions still offer free checking with no strings attached. To be fair, you can sometimes qualify for free checking at big banks, and you may have to do the same at some credit unions.

If you’re thinking of switching to a credit union (or moving from bank to bank), make sure it actually makes sense to jump ship. Moving accounts can be a pain, and your current credit union may be able to offer solutions that keep you happy where you are. When it comes time to make a move, use an account closure checklist to ensure nothing falls through the cracks.