How Do Credit Unions Work and How Are They Different From a Bank?

how do credit unions work

You’ve likely often heard of credit unions as an alternative to a bank. They may offer the same products, but the benefits of being in a credit union are not quite the same.

A closer inspection of their offerings shows that credit unions are unique in their operation.

The truth is that it’s always best to check the options available before opening a bank or a credit card. Many people find it surprising that the products in credit unions have better terms.

Here’s what you need to know about them and how they differ from banks:

 

What Is a Credit Union?

Credit unions operate in the same manner as banks. They are financial institutions through and through, but that’s where the similarities end.

Banks work to earn a profit for their owners or board members. Credit unions, on the other hand, operate for their members.

Members established them, and it works to serve them.

As such, you’ll find that most credit unions are nonprofit entities. It’s one of the reasons why you’ll find that they offer better rates than most banks.

 

“Before the arrival of the Credit Union, people who were from a poor background or a working class background couldn’t borrow from banks.” – John Hume

 

It’s possible to see loan deals you wouldn’t be able to touch in a bank or savings rates that are much higher than the norm.

However, you must be a member of the credit union to be able to take advantage of these features. The requirements differ for each, though they’re relatively easy to join.

Some may even help you with your application. The restriction often comes with the scope of membership. For example, the credit union may only serve the immediate area.

 

What Is the Difference Between Credit Unions and Banks?

The main difference between credit unions and banks is the membership clause. When you become a client or member of a bank, you are a customer.

Members of credit unions are essentially part-owners. This is because most of the institution’s actions come from those who use their services.

 

How Do Credit Unions Work?

How do credit unions work? They must consult with their members when they want to move forward with a new product or make a change. Every vote counts and the majority must agree on the credit union’s direction.

Here are some other features that you’ll find are different from your local bank:

  • Credit unions give profits back to their members. If they pocket any, it will only be to continue the union’s operation. The rest returns in the form of lower rates, higher savings, reduced fees, etc.
  • These credit unions often have close ties with the local community. As such, you’ll find them organizing and participating in events.
  • Credit unions are more invested in the financial education of their members. They may provide outreaches or workshops to help inform their members. It’s also common for them to reach out to their local community to encourage people to join.

However, while all of this provides some benefits, it requires membership. Depending on the credit union you join, some may also have a limited scope.

Some larger credit unions serve more people, but the focus is local. Banks often have a national reach in comparison.

Even then, credit unions aren’t lacking in products, services, and technology. You’ll find they have partnerships with ATMs, and there’s no problem making online transactions through their services.

Depending on the size of the credit union and the decisions of its members, the products may be more limited. Banks often have a wider variety, while credit unions are focused because they are member-driven.

 

What Products and Services Do Credit Unions Offer?

While not all credit unions are the same, they will often have some similar products across them. This is because these are the ones that capture most of the demand and interest of their members.

Here are some examples:

  1. Savings and checking accounts: Opening an account to store your money for future use is something many people want. The deposit and minimum requirements may differ depending on the union. Some will offer newer features like mobile banking, applications, online bill payments, and more.
  2. Mortgages: Getting a loan for your home purchase is one of the most common and significant debt people get into. You’ll often find better terms and rates within credit unions. Some even have more relaxed requirements, allowing you to get deals that aren’t available with banks.
  3. Other loans: Apart from mortgages, you’ll also find other loans available within credit unions. The most common would be the auto loan, followed by personal loans. Many also offer business loans for those wanting to start a local business.
  4. Refinancing: Sometimes, you’ll want to refinance a loan to get better terms and rates. Other times, it’s to help consolidate all your debt into one payment.Some credit unions may offer these types of products.
  5. Investment services: There are numerous types of investment services in these institutions. The most common would be retirement planning. Another alternative is offering investments for stocks, mutual funds, and other assets.
  6. Insurance: Some credit unions have insurance services to offer coverage for your property or vehicle. They either handle the insurance themselves or have a partnership with a company that does it for their members.
  7. Credit cards: Some credit unions may offer credit cards or debit cards that you can apply for. There are many types available, depending on the credit union.They may even tie into the account you opened with them.

 

The Advantages of a Credit Union

Credit unions offer a more personalized service. When you need help or need a decision-maker within the institution, they’re always nearby.

This is because of the close ties these institutions have to their communities. With banks, you may encounter situations where the people you need to talk to aren’t readily available.

As such, credit unions can provide you with the service you need. Do you need to learn more about loans? They’ll make time for their members and provide them with options so you can make an informed decision.

They’re also a great option if you want your money local and accessible. The accessibility and fine-tuned products often make them a good choice for small businesses in the area.

You’ll also want to join a credit union because:

  • They have more relaxed terms and requirements when it comes to loans
  • They often offer higher interest rates when it comes to savings
  • Fees are few and affordable, only needed to help the credit union operate.

 

How to Join a Credit Union

If you’re planning to join a credit union, their requirements are the first thing to check. Opening membership may vary.

Most credit unions open their doors to people who live in a town or do specific work. Others may even have listed employers that qualify. Other connections include:

  1. Labor unions
  2. Schools
  3. Organizations
  4. Members from family

If you’ve checked the credit union and don’t have the necessary qualifications, it still pays to talk to one of their representatives. Some will open their doors to joining by becoming a member of an organization.

For example, a credit union may require you to become a part of a charity. They’ll even pay the fee needed on your behalf.

Most will also require a small membership fee, a one-time payment. You’ll also need to maintain a minimum balance when opening an account.

Always deal with credit unions the way you deal with banks. Check the products and services they offer to see if they fit you.

You may also want to compare several credit unions if you have the option to check. If they don’t have what you’re looking for, you should spend your time looking at other options available.

 

Credit Union Considerations

Checking your local credit union to see what they offer is crucial. Some people forget to read about the offerings or ask about them when applying.

They end up disappointed because the product or service they were looking for wasn’t there.

Another consideration for people is the technology these organizations provide. They may not have as efficient websites or applications because of a smaller budget.

It all depends on the credit union and how much the members are putting into improvements to their service. The good news is that many are catching up to what banks are doing.

There’s also the case of branch locations. If you travel a lot, check if your credit union has connections to ATM providers, online services, and other financial institutions.

You don’t want to end up somewhere you cannot access your community.

The membership concept may be something that some do not like. Some don’t mind having a membership, but others don’t feel the need for it.

When comparing credit unions’ offerings, membership for the benefits may outweigh your hesitation.

 

Regulation

A common concern when joining credit unions is their regulation. You have a right to feel hesitant because of the difference in the operation of these institutions from banks.

Since they are mostly locally tied and member-connected, how do they check for things like fraud cases? When the credit union goes under, can it still be held accountable?

Nearly all banks have connections to the FDIC or Federal Deposit Insurance Corporation. They are the assurance that protects bank clients from a loss if the bank closes.

Credit unions do not have coverage from FDIC, but that doesn’t mean they don’t have anything.

In 1970, Congress created the NCUA to help provide insurance for credit unions. The National Credit Union Administration operates in the same way as the FDIC.

It came nearly 40 years later than banks, but credit unions were a relatively new concept back then.

Like the FDIC, the NCUA provides deposit insurance of $250,000 per share owner. As long as the credit union has a partnership with the NCUA, it will apply.

Since credit union members are part-owners, it adds even more assurance that they have protection from the NCUA.

When applying for a membership, one of the things you can check is the coverage of the NCUA. All it takes is going through their website and seeing if the credit union’s name is there.

Verify the insurance status of the institution to help bring more confidence to your decision.

 

Putting It All Together

Now you understand what credit unions do, how they operate, and the considerations you need to make. Weigh up your options and consider if the credit union holds the solution you need.

You’ll slowly start to see if going to a credit union or a bank is the best option for you at the moment.

Banks are convenient, but credit unions have personalization. Some have connections with a close-knit community which many people like about these institutions.

Banks are pushing for new products and technology. Some credit unions may be slow to get there, but every step is to improve the member experience.

Lastly, you don’t have to choose one of them and shut out the other entirely. Many people have bank accounts but also take time to get memberships from credit unions.

It opens doors to all potential avenues.

If you’re looking for a credit union to join, consider becoming a part of 121 Financial Credit Union. We serve members throughout Northeast Florida and have our main branch in Jacksonville.

Get the financial help you need and grow with your community. 

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