A credit union is very similar to a bank but there is a major difference, it’s not run for a profit like a bank is. A credit union isn’t taxed which means they can offer higher interest rates on things like a savings account and lower interest rates on things like an auto loan.
Another term for a credit union is a “financial cooperative” which means the members share a percentage of the bank. This means that each member essentially owns a piece of the business with their cash.
A credit union typically has higher requirements to join and they vary quite a bit.
How Does a Credit Union Work?
A credit union is owned and operated by its members who have to meet specific qualifications. Essentially the members pool their money together and create a source for loans and other financial products. To join a credit union you usually need a higher credit score and a one-time payment to join. If you haven’t yet, you should get a free credit report to make sure your credit history isn’t in jeopardy.
Historically credit unions would look at your employer, work history, place of worship, school or even geographic location. They were pretty restrictive but have opened up quite a bit in the recent years.
The primary reason they were so restrictive is because they offered some of the best rates you could get since it was all member funded. A good way to view a credit union is that it’s a small community of, usually, like-minded people.
Each member of the credit union can vote for, or run to be on, the board of directors and they each have a say in how the credit union is run.
A credit union usually offers the same services that a bank does but at a much smaller scale. In some cases, depending on the size of the credit union, they can only lend out specific amounts.
Credit Union vs Bank
As stated, the biggest difference between a credit union and a bank is that one is for profit and one is not-for-profit.
A bank’s job is to be as profitable as possible to its shareholders. A credit union’s job is to serve the customer(s) with the best services possible.
A bank will offer lower interest rates on things like savings accounts and higher interest rates on things like auto loans. This is to drive up their profit margin.
A bank, usually, is more lenient on lending and will be much quicker to offer you a credit card, auto loan or even a mortgage with no restrictions on credit or income. There is no right or wrong way to go about where you should bank or store your money but if you’re able to, a credit union is typically the best way to go.
In many cases it is best to have accounts with a bank and a credit union to take advantage of services offered at both.
Advantages of a Credit Union
Some common advantages of a credit union:
- More-Personalized Experience
- Higher Interest Rates on Investment Accounts & Savings Accounts
- Lower Interest Rates on Personal Loans, Auto Loans, Mortgages and Credit Cards
- Lower Banking Fees
- Community Focused & Usually Participates in Community Events
Disadvantages of a Credit Union
Some common disadvantages of a credit union:
- Stricter Membership Requirements
- Limited Funds to Lend
- Delayed Technology Advances (Apps, Online Banking, etc.)
- Limited Locations & ATMs