Most people are familiar with banks, whether it’s a traditional brick-and-mortar bank or online. But if you asked someone what a credit union is, it’s less likely they could give you a proper answer.
Credit unions have been in business in America for more than 110 years, and there are currently more than 123 million people who use them in the U.S.
Credit unions have many similarities to banks, but they also have some key differences, including very different structures and focus. Here’s an in-depth look at credit unions, how they work, the products and services they offer, and the requirements to join.
Credit Union History at a Glance
- In 1909, St. Mary’s Cooperative Credit Association (Manchester, NH) becomes the first credit union opened in the U.S.
- President Franklin Delano Roosevelt signed the Federal Credit Union Act in 1934, creating the Federal Credit Union Division
- Morris Sheppard Federal Credit Union (Texarkana, Texas) becomes the first federally chartered credit union
- In 1942, the FDIC took over federal supervision of credit unions
- The National Credit Union Administration (NCUA) is formed in 1970 and becomes the official independent federal agency to charter and supervise federal credit unions
- As of April 2020, there are more than 5,000 federal credit unions in the U.S.
What Is a Credit Union?
A credit union is a not-for-profit financial organization that exists to serve the needs of its members. On a basic level, credit union members have access to many of the same products and services found at traditional banks.
As with banks, money kept in credit union accounts is federally insured. However, insurnace is provided by the National Credit Union Association (NCUA) rather than by the FDIC. Deposits at all federal credit unions, along with the majority of state-chartered credit unions, are insured up to $250,000 per depositor by the NCUA through the National Credit Union Share Insurance Fund (NCUSIF).
Members of credit unions are also owners, and you must meet their membership requirements to be considered to join. Eligibility requirements differ at each credit union. There are federally chartered and state-chartered credit unions. Credit union members elect a volunteer board of directors to manage the credit union. Each member has one vote.
A credit union serves the best interests of its members, which often includes having better rates and fees than you might see at for-profit banks.
How Do Credit Unions Work?
Credit unions run as non-profit organizations run by their own members (customers) and are overseen by a voluntary board of directors elected by the members.
When you become a credit union member, you also become an owner and have a say in who is on the board. Typically, becoming a member requires opening a savings account through purchasing a share at the credit union. This typically costs between $5 and $25. Members of credit unions usually share a common bond, such as:
- Where you live or work
- Place of worship
- Homeowners’ association
- Labor union
- Military affiliation
Membership requirements and restrictions vary with each credit union. There are several credit unions in the U.S. that anyone can join. Alliant Credit Union and Air Force Federal Credit Union, for example, only require a donation to a partner charity to join.
Credit unions provide a cooperative banking environment for consumers — one in which long-term customer relationships are valued. Credit union members look out for each other by pooling their money together to provide deposit accounts, loans, and other financial services to each other. Since they are non-profit organizations and exempt from federal taxes, credit unions invest all of their profits back into their members through better interest rates, lower lending rates, and lower fees.
Differences Between Credit Unions and Banks
Credit unions and banks provide financial solutions to their customers, but that might be one of only a few things they have in common. Here’s a look at the major differences between credit unions and banks.
Profits: Credit unions are not-for-profit organizations and exist to serve their members. They only need to make enough earnings to cover operational costs. Any profits are passed back to members. Banks are for-profit businesses and make decisions based on the best interest of their shareholders.
Membership: Opening an account at a credit union requires membership. Qualifications vary between credit unions, but generally it costs under $25 to join. Banks typically do not require membership.
Tax-Exempt: Credit unions still pay state taxes, but they are exempt from federal taxes. This is another way that they pass along savings to their members.
Fewer Options: Most credit unions offer fewer account choices compared to national banks. For example, Wells Fargo offers five checking accounts, two savings accounts, various CDs, six credit cards, a host of lending solutions, investment and retirement accounts, and business and commercial banking options. You could find similar choices at larger credit unions, but most of the smaller credit unions offer fewer banking solutions than you would find at most banks.
Fewer Locations: Credit unions can’t compete with most banks in terms of the number of national branches or ATMs. Many credit unions create co-ops with other credit unions to provide access to more branches and fee-free ATM networks. However, many credit unions and banks offer online banking and mobile apps so you can bank from anywhere.
Technology: While some credit unions offer online and mobile banking, they are nowhere near what’s available in the banking world. However, credit unions are beginning to close this gap, and a few even offer better solutions than banks.
Leadership: As mentioned before, the members of a credit union vote on a volunteer board of directors, including a chair or president. The board of directors manages the credit union.
Customer Service: Because you are a member of a credit union, customer service is usually excellent and will almost always be with a live person who works in your own community. Banks typically offer sub-par customer service.
Accounts Offered at Credit Unions
Credit unions offer many of the same accounts provided by banks plus some less common bank products. Banks typically offer a more extensive range of accounts than credit unions, but it depends on the specific credit union. Here are some of the accounts you may find at a credit union.
- Checking accounts
- Savings accounts
- Health savings accounts (HSA)
- Holiday cash club and other club accounts
- Individual Retirement Accounts (IRAs)
- Money market accounts
- 529 plans
- Coverdell education savings accounts (CESA)
- Certificates of Deposit (CDs)
- Custodial accounts
- Credit cards
Savings accounts are often referred to as share accounts at credit unions. Many credit unions require you to open a share account as a condition of membership. Share accounts and club accounts are the perfect places to build an emergency fund. Credit unions are also a great place to get financing for various purchases due to lower fees and higher interest rates, including:
- Home equity lines of credit (HELOCs)
- Home refinancing
- Auto loans
- Student loans
- Personal loans
Credit Union Resources
The NCUA has two resources available to help consumers find the right credit union.
- Credit Union Locator: Locate basic information on local credit unions, including branch locations, drive-thrus, and ATM services.
- Research a Credit Union: Use this tool if you want to access more detailed information about a specific credit union, including membership type, history, and leadership.
You can also tell if a credit union is federally insured by looking for the official NCUA insurance sign, usually located on a credit union’s website and below teller stations at local branches.
Credit unions aren’t perfect, but they provide a cost-effective alternative to traditional banks, depending on your needs. If you’re interested in joining a credit union, start by checking with your employer or your current associations — such as your college or church — to see what options are available. Evaluate whether a bank or credit union is right for you. You could even use both and take advantage of the best of both worlds.