What Is a Credit Union?

Customer holding document and smiling while bank teller serving.
•••

​Simonkr / Getty Images

DEFINITION
Credit unions are financial institutions owned by their members and operated as nonprofits.

Credit unions are financial institutions owned by their members and operated as nonprofits. Initially created to serve and support people who share a common bond (such as place of employment or residence), many credit unions offer many ways to join and enjoy membership benefits. 

Let’s explore what credit unions are, the services they provide, and how credit unions work, as well as the types of credit unions, membership requirements, and how they compare to other financial institutions such as community banks. 

Definition and Example of Credit Unions

A credit union is a not-for-profit financial institution co-owned by its members. A credit union's members elect a volunteer board of directors to help manage the credit union. Profits are “returned” to credit union members in advantageous financial products and terms, while shareholders benefit from bank profits. Some credit unions return profits as annual dividends.

A member banking with a credit union might benefit from lower-than-average interest rates on loans or credit cards or higher-than-average interest rates on any money they save with the credit union.

Many credit unions were originally established by and for a specific group of individuals. For example, the Navy Federal Credit Union was originally for Navy service members. Today, the credit union welcomes all current and retired armed forces (including the National Guard and Space Force), their household and family members, Department of Defense civilian employees, contractors, and reservists, among others.

The National Credit Union Association (NCUA), created in 1970, regulates credit unions. The U.S. government backs federally insured credit union member accounts of up to $250,000 per account, similar to how the Federal Deposit Insurance Corporation (FDIC) backs bank deposits of up to $250,000.

How Credit Unions Work 

Any profits the credit union receives as a result of lending, borrowing, or acting as a depository are returned to the members, typically in the form of lower interest rates on credit cards, home loans, personal loans, and car loans. This is paired with higher interest rates on CDs, money market accounts, and potentially, other savings accounts.

Credit unions aren’t immune to financial winds. Credit unions often offered slightly higher interest rates for regular savings accounts in the past. As of late 2021, however, credit union national average rates for savings accounts are on par with banks’ national average rates due to the low-interest-rate environment overall.

To become a member of a credit union, an individual opens a “share account” (like a savings account) with a small dollar amount. This represents your “share” or investment in the cooperative financial institution and is refundable if you close your account.

Typically, you can open a credit union account and conduct your banking as you would at any other financial institution. These accounts may have different names: 

Bank Credit Union
Customer or account holder Member
Savings account Share account
Checking and savings account Share draft account
Certificate of deposit Share term certificate or share certificate

Accessing Accounts

Many credit unions offer limited brick-and-mortar locations for banking services, and limited ATMs for withdrawing money, often located in specific geographic areas. One of the largest credit unions, Navy Federal Credit Union, offers 350 branches. One of the largest U.S. banks, JP Morgan & Chase, offers 4,700 branches.

To offer members access, just under 1900 credit unions are part of the CO-OP Shared Branch network. If a credit union member needs to deposit a check while traveling, they can visit a partner credit union’s location or use its ATMs without paying a fee. The CO-OP Shared ATM network offers more than 30,000 surcharge-free ATMs throughout the U.S. and 10 nations.

There may be some limitations, though—for example, you might be limited to $500 per day in withdrawals at the shared branch, funds may not be immediately available, or there may be fees associated with various services.

Some credit unions may refund or rebate fees incurred from using out-of-network ATMs for cash withdrawals for certain account types. 

Credit Union Services

Credit unions offer many of the same services as those found in banks, including: 

  • Accounts for savings, checking, and certificates of deposit
  • High-yield savings accounts
  • Online, ATM, and mobile banking
  • Mobile, online, and person-to-person payments 
  • Credit cards
  • Investment services including IRAs, other retirement accounts, and living trusts
  • Consumer loans for cars, boats, RVs
  • Student loans
  • Small business loans
  • Mortgages, home equity loans, and home equity lines of credit (HELOC)
  • Wire transfers, cashier’s checks, and ACH deposits
  • Safety deposit boxes
  • Personal insurance services

Services and products vary by credit union, and many come with provisions; a high-yield account, for example, could require a certain credit card spend or balance. You’ll need to carefully review the options to ensure the credit union offers what you hope to find. 

Credit unions may present limited choices, as well. For example, a credit union might offer only a handful of consumer credit cards versus the dozens offered by a bigger bank. The new-cardholder bonus or cash-back rate may be lower than bonuses at larger banks—but the interest rate may be lower as well. 

You may not be able to perform some international services with a credit union account. For example, the credit union may not support wired transactions in a foreign currency, while banks may be better able to. Some banks may also provide cash in foreign currency or exchange foreign cash you return with from your travels—both more uncommon at a credit union. 

Who Can Join a Credit Union?

While anyone can join a bank, a credit union may require you to be part of a particular constituency to become a member and open an account. Typically, you need to have something in common with the other members. 

Gerenally, you can join based on one or more of the following categories: 

  • Employment: If you work for a specific employer or you’re employed within a particular profession or trade
  • Family: If you’re related to an existing credit union member 
  • Location: If you work, attend school, or live in a certain geographic area  
  • Membership: If you’re a member of a school, union, organization, or other group 

Many credit unions offer more than one path to membership, but you’ll often have to look beyond the name—which usually indicates for whom the credit union was originally intended, but has since expanded the field of membership. As an example, eight Delta Airlines employees founded the Delta Employees Credit Union in Georgia in 1940. Today, to join the Delta Community Credit Union, potential members can qualify by their geographic location, employment by dozens of local and national businesses, family relation to a current Delta Community CU member, or as part of membership in a variety of associations.

You may be able to join a credit union by first joining an organization. For example, becoming a member of Foster Care to Success makes you eligible for Alliant Credit Union membership, even if you don’t qualify in any other manner.

How Much Do Credit Unions Cost?

Initial membership or sign-on fees for most credit unions are minimal. The credit union may ask you to make a refundable contribution of a few dollars toward your share account to get your membership started. Other credit unions may require initial deposits of $25 or more, or a small donation to an organization. To join the Lake Michigan Credit Union, for instance, a $5 donation to the Amyotrophic Lateral Sclerosis Foundation is required if you don’t meet any of their geographic or employment requirements.

Fees at credit unions are often much lower than other banking institutions. For example, many credit unions offer free basic checking accounts that don’t require a minimum balance and don’t charge monthly maintenance fees.

However, fees can be and are often still charged for other products or services, including stop payments, nonsufficient funds, card replacement, or wire transfers. Some credit unions charge monthly fees for certain checking accounts, although they may come with additional services. 

Credit unions may charge inactivity, dormant, or “non-participation fees” if you don’t appear to be using your accounts, usually after some time, such as 12 or 24 months. 

Types of Credit Unions

There are a few credit union types that serve special populations: 

  • Low-Income Credit Unions: Serves a population in which more than 50% of its members qualify as “low-income,” earning 80% or less than the median family income or individual income for designated locations. The population’s unique needs may include access to small-dollar loans and business loans, money orders, check cashing, and financial education. 
  • Minority Depository Institutions (MDIs): To qualify as an MDI, more than 50% of current members, current and eligible members (from the community), or current board members must be from these federally recognized minority groups: Black American, Asian American, Hispanic American, or Native American. 
  • In-School Credit Union Branches: Also known as student-run credit unions, these credit union branches allow students to open savings accounts and deposit money into their accounts. Branch services vary by the school and credit union and often rely on student or parent volunteers trained to carry out tasks. 

Credit Unions vs. Banks

Here’s a quick look at credit unions versus traditional banks. 

  Credit Unions Large Banks
Tax Status Not-for-profit For-profit
Use Members united by a common bond Anyone
Physical Branches Possibly limited unless credit union is in CO-OP network Range between 1 to thousands
ATMs Local only unless in an ATMs network Often nationally available
Account name Share account Savings account
Services and products Vary by credit union Usually consistent, although some products or rates may vary by consumer or bank location
Savings, money market, CD interest rates Generally higher Generally lower
Loan and credit card interest rates Generally lower Generally higher
Fees Generally fewer Generally more
Fund Insurance Up to $250,000 by NCUA (National Credit Union Administration) Up to $250,000 by FDIC (Federal Deposit Insurance Corp)
Profits Returned to members through dividends, advantageous rates or fewer/lower fees Distributed to shareholders
Foreign cash access and wires May not be as readily available Readily available, particularly at larger or international banks

Alternatives to Credit Unions: Community Banks or Online Banks

If you don’t qualify for credit union membership or there isn’t one in your town, a community bank is a possible alternative. A community bank is usually privately and locally owned. According to the U.S.Federal Reserve, community banks typically hold less than $10 billion in assets.

Community banks often also offer: 

  • Lower fees 
  • Better interest rates for loans, credit cards, and savings accounts
  • Local control and decision making 
  • Lending for local small businesses
  • Community relationships, involvement, and specialization 

Online banks or online-only accounts can be another alternative not charging checking account maintenance fees, although they may have minimum balance requirements to earn higher interest rates, and may not have physical branches.

Key Takeaways

  • Credit unions return profits to members through better interest rates, lower fees, and dividends.
  • Credit unions are regulated by the NCUA, which guarantees deposits of up to $250,000.
  • Services and products at credit unions vary widely.
  • Compare the service options and products you’re likely to use at a credit union on an apples-to-apples basis to banks, online banks, and community banks. 

Article Sources

  1. Neighbors Federal Credit Union. “Credit Unions vs. Banks.” Accessed Jan. 25, 2022. 

  2. Navy Federal Credit Union. “Am I Eligible for Membership?” Accessed Jan. 25, 2022. 

  3. National Credit Union Administration. “Share Insurance Fund Overview.” Accessed Jan. 25, 2022. 

  4.  National Credit Union Administration. “Credit Union and Bank Rates 2021 Q3.” Accessed Jan. 25, 2022.

  5. The People’s Federal Credit Union. “What Do Credit Unions Do?” Accessed Jan. 25, 2022. 

  6. Navy Federal Credit Union. “Branches & ATMs.” Accessed Jan. 25, 2022. 

  7. Chase. “Empowering Your Life.” Accessed Jan. 25, 2022. 

  8. CO-OP FInancial Services. “CO-OP ATM Network.” Accessed Jan. 25, 2022.

  9. My Credit Union. “Shared Branches.” Accessed Jan. 25, 2022.

  10. Delta Community Credit Union. “About Delta Community Credit Union.” Accessed Jan. 25, 2022.

  11. Delta Community Credit Union. “​​Membership Eligibility.” Accessed Jan. 25, 2022. 

  12. Alliant. “Frequently Asked Questions.” Accessed Jan. 25, 2022. 

  13. Lake Michigan Credit Union. “It’s Easy To Join.” Accessed Jan. 25, 2022. 

  14. MyCreditUnion. “Low-Income Credit Unions.” Accessed Jan. 25, 2022. 

  15. National Credit Union Administration. “Minority Depository Institutions.” Accessed Jan. 25, 2022. 

  16. Board of Governors of the Federal Reserve System. “Community Banking.”​​ Accessed Jan. 25, 2022. 

  17. Institute for Local Self-Reliance. “Top 5 Reasons to Choose a Community Bank or Credit Union.” Accessed Jan. 25, 2022.