What Is a Credit Union?

What Is a Credit Union?

Let me tell you directly: a credit union is a financial cooperative that delivers traditional banking services. These can range from small, volunteer-run outfits to large operations serving thousands across the country, often formed by corporations or organizations for their employees and members.

You need to know that credit unions are created, owned, and operated by their members. This makes them not-for-profit enterprises with tax-exempt status.

Key Takeaways

Here's what you should remember: credit unions function as financial cooperatives offering banking services to members. They typically have fewer products than banks but provide better rates and more ATM access. This is possible because they're not publicly traded and only need enough revenue for daily operations. On the downside, they often have fewer physical locations, which can be inconvenient if you prefer in-person service. Also, they're exempt from corporate income tax on earnings.

Understanding a Credit Union

I'll explain the basic model: members pool their money by buying shares in the cooperative, which then provides loans, deposit accounts, and other financial services to each other. Any income goes toward projects and services that benefit the community and members' interests.

Requirements for Membership

Originally, you had to share a common bond—like working in the same industry or living in the same area—to join. But credit unions have relaxed these rules, often allowing anyone to become a member.

To do business with one, you must join by opening an account, usually with a small deposit. Once you do, you're a member and partial owner. That means you can vote on the board of directors and other decisions. Your vote is equal to everyone else's, no matter how much money you have in your account.

As of March 31, 2023, the NCUA reports that membership in federally insured credit unions reached 136.6 million.

Fast Fact

Total assets in federally insured credit unions stood at $2.21 trillion as of March 31, 2023.

Advantages of Credit Unions vs. Banks

Let's look at the non-profit status first. Credit unions attract deposits like banks, but their nonprofit setup gives them edges: they're exempt from corporate income tax, and they only need enough earnings for operations, allowing narrower margins than profit-driven banks.

This leads to better rates and fees. Profits go back to members through higher deposit interest, lower service fees, and savings on loans and accounts. NCUA data from March 31, 2023, shows credit unions offered 2.66% on five-year CDs versus banks' 1.83%, and 0.53% on money markets versus 0.43%. These differences add up. Credit unions also provide better rates on mortgages like 15-year and 30-year fixed options, which could suit you if you're buying a home.

Disadvantages of Credit Unions vs. Banks

One clear drawback is fewer locations. Credit unions have fewer branches than banks, which matters if you value in-person service, though most offer online banking and auto-bill pay. Their smaller size can limit accessibility.

Technology is another area: smaller credit unions often lag in website and security features due to budget constraints, but larger ones may have apps rivaling big banks.

They also offer limited products and services. While covering basics, choices are fewer—for example, Bank of America has 20 credit cards, but Navy Federal has six and State Employees’ Credit Union has one.

Flexibility is less too. Banks often have extended hours, open late weekdays and Saturdays, while credit unions stick to 9 a.m. to 3 p.m. Monday through Friday, though bigger ones like SECU have 24-hour hotlines.

Insurance on Credit Union Accounts

The FDIC doesn't cover credit unions, but the NCUA, established in 1970, does for federally chartered and most state-chartered ones. It administers the NCUSIF, using federal funds to insure shares up to $250,000 per account type—like individual, joint, trust, retirement, or business accounts. For instance, if you have an individual account, Roth IRA, and business account, you're covered up to $750,000 total. You can check NCUA-regulated credit unions on their website.

What Benefits Do Credit Unions Offer?

Typically, you get higher rates on interest-bearing accounts, lower loan rates, reduced fees, and more personal customer service.

Can Anyone Join a Credit Union?

Many now open membership to all, but some still require specific eligibility. Check the 'field of membership' on their website.

How Do I Join a Credit Union?

Find one that interests you, then look for membership details and an application on their site. You'll provide personal info like for any financial account and make an initial deposit to fund it.

The Bottom Line

Credit unions are smaller than most banks and serve specific regions, industries, or groups. They may have fewer branches but often join large ATM networks for access. They cover operations and return excess profits to members via lower fees, higher deposit rates, and lower borrowing costs. Correction—Feb. 12, 2025: This article has been corrected to state that the NCUA was established in 1970.