In this article, we want to discuss the pros and cons of credit unions. We hope that this article will answer any questions you might have about credit unions, and also clear up any misunderstandings regarding credit unions.
Many people think of credit unions and banks as fairly interchangeable financial institutions. While they are both offer similar services, they operate in significantly different ways and have some pretty important differences.
Commercial banks are for-profit institutions that pay dividends to their stockholders while credit unions are not-for-profit and pay dividends to their members. Learning about the pros and cons of using a credit union can help prospective members decide if a credit union is a right fit for their needs.
The Difference Between a Credit Union and a Bank
Credit unions are pretty similar to other financial institutions on the surface. They offer deposit checking and savings accounts and often frequently have money market accounts, CDs and a variety of loan products, too.
Most credit unions are small and local and designed to serve a specific population, such as a fraternity or community. Membership is generally restricted to that population although there can be exceptions to that rule.
The primary difference between credit unions and banks is their non-profit status. Credit union account holders are considered members rather than customers. Because credit unions are owned by their members, they are not accountable to shareholders the way banks are.
This means that credit unions tend to be more focused on keeping their members happy, which leads to lower interest rates on loans and credit cards, lower fees on accounts and higher interest rates on savings accounts and investment products compared to for-profit banks. The non-profit status of credit unions also means that they pay no corporate income taxes, which can further lower costs for their members.
Banks are accountable not just to their customers but also to their shareholders. They have to earn a profit, which can lead to higher fees, lower interest rates, and policies that are not necessarily equally friendly for all account holders.
As for-profit entities, banks must also pay corporate income taxes, and they pass that overhead and other operating costs onto their customers in the form of higher fees and interest rates on loans.
Pros and Cons of Credit Unions
The Pros of Credit Union Membership
When it comes to credit union advantages, there are quite a few, from membership and part ownership to keeping more of your own money. Here we list the top 10 benefits of choosing a credit union for your financial services needs.
1. Credit union membership
When people join credit unions, they are not just customers but rather members of the credit union. This isn't just an issue of semantics. As a member of a credit union, an individual will receive all the benefits of membership, including part ownership and dividends.
Members also get voting rights, which means that they have a say in all important credit union decisions, including:
- Electing or dismissing board members
- Adopting or amending bylaws
- Establishing or terminating membership or shares
Members, no matter how small their deposits, will have an equal say in how the credit union is run. They can ensure the decisions that are made benefit both them as individuals and their community as a whole.
2. Affordable fees and fantastic rates
Credit unions are nonprofit organizations, and this allows them to keep member fees lower. Credit unions also offer auto loans, boat loans, student loans and home equity loans just like commercial banks, but their rates are often significantly lower than traditional banks.
They also tend to offer higher interest rates on share and demand deposit accounts, such as savings and checking accounts. Surveys have found that their interest rates on CDs are significantly higher than the interest rates of the average bank.
3. Periodic Dividends
On top of the normal interest rates in the deposit accounts, members might also be eligible for occasional dividends. Banks offer dividends to their investors and stockholders, but with a credit union, the members are the investors.
Therefore, when the investments do well, the members reap the benefits in the form of these extra payments.
4. Individualized attention
Banks tend to streamline the approval process on loans and credit cards with strict requirements on income, deposits and credit scores. This helps them move applications more quickly.
Credit unions have more leeway with the process, so when a member’s credit record is not flawless, they might still have options. A credit union can take more time to work with each member, especially those who are in good standing, to find the right loan or credit card product to meet their needs.
So when it comes to the pros and cons of credit unions and credit cards, credit unions can be the way to go for many people.
When it gets right down to it, that individual attention really allows credit unions to shine among financial institutions. They regularly rank at the top with across-the-board customer satisfaction and top customer experience rankings, according to Temkin Trust Ratings and CSP.
5. Simpler products
Credit unions offer many of the same products that banks do, but these products are often simplified, easy to use and easy to understand.
About a third of banks offer no-strings-attached free checking, which means that customers do not need to have a minimum balance or use direct deposit. Many other banks offer "free checking" with plenty of strings.
For example, customers have to maintain a certain balance, make a certain number of signature transactions a month or sign up for a direct deposit.
On the other hand, the vast majority of credit unions offer free, no-strings-attached free checking, making it easier to get the services you need without time-intensive shopping around.
These simple, no-nonsense accounts eliminate the hassles of banking and make it easy to do your financial business. Members can just get on with the day, worry-free.
6. Plenty of Products
Products are not just simpler: They are also more versatile. Most credit unions are smaller than commercial banks, but they still have plenty of useful products to meet each member's needs.
At 121 Financial Credit Union, we offer a comprehensive selection of financial products, including:
- Youth accounts
- Savings accounts
- Checking accounts
- Holiday savings accounts
- Money market accounts
- CDs
- Credit cards
- Mortgage loans
- Vehicle loans, including RV and boat loans
- Personal loans
- Student loans
- IRAs and retirement planning
- Insurance products
We can help prospective, new and existing members find just the right products to meet their needs.
7. Unparalleled customer service
Credit unions tend to be smaller organizations and are often associated with specific geographic areas or locations. The staff is local, and the branches tend to be small and member-focused rather than profit-focused.
At a local credit union, members can benefit from the personalized service they get through their credit union. The staff can help guide them to the best products for their needs and help them sign up for seminars and programs that can help them become more financially literate. As they become more familiar with a member’s needs, they can better serve them.
Ultimately, this is a much different kind of relationship than banks have with their customers. At a bank, the primary goal is making a profit, which requires keeping customers happy but also keeping stockholders happy. There is less of a need to get to know customers and understand their financial situations, and that means that many people can simply fall through the cracks.
8. Financial literacy programs
As smaller institutions, credit unions have the luxury of spending more time getting to know their members and ensuring their needs are well-met. Matching them with the right financial products is only part of their job description. Promoting financial literacy is another big part of their mission.
While anyone can benefit from becoming more financially adept, these programs can be especially beneficial for low-income members. A significant percentage of people who use credit unions for all their financial needs have incomes below $75,000, and some credit unions cater primarily to lower-income members. They are committed to providing traditionally underserved populations with a wide range of financial products.
While low-income groups often struggle to gain approval for an auto loan or mortgage, a credit union can help them find the best and most affordable product for their needs.
Many credit unions also offer a variety of counseling and training programs to help their members navigate complex financial issues ranging from homeownership to retirement planning.
Financial literacy programs are even available for kids and teens to help lay the groundwork for a lifetime of healthy finances and smart spending habits.
At 121 Financial Credit Union, we offer a variety of programs designed to help our members no matter what stage of life they are in, including:
- Personal and family budgeting
- Money management
- Improving credit score
- Debt repayment
- Preventing bankruptcy, repossession, and foreclosure
9. Strong community focus
For those who enjoy shopping at small businesses and staying local, credit unions fit in well with this philosophy. Credit unions are local businesses with a strong focus on the community.
In 2018, credit unions loaned business members nearly $6 billion, and commercial loans reached almost $7 billion. In other words, credit unions and their members are helping keep communities strong and growing, and they are keeping those funds local.
The community focus isn’t just about business, however. Credit unions are also big on community education, charitable programs and scholarships for local kids. For those who are interested in keeping their money local and supporting their neighbors and communities, a credit union is a fantastic choice.
At 121 FCU, we’re proud supporters of Gabriel House of Care, the Heart 2 Heart Giving Circle and more local initiatives. We even have ways for our members to get involved through volunteer work, too.
10. Worry-free savings
Commercial banks protect their deposits with the FDIC. Credit unions are typically insured by the National Credit Union Administration, which covers member deposits up to $250,000 at all federally insured credit unions.
This includes all federal and many state-chartered credit unions. The NCUA is backed by the National Credit Union Share Insurance Fund, which is backed by the U.S. government to protect members’ savings. The NCUA also grades credit unions with regular assessments of individual credit unions’ fiscal health and management.
Private credit unions are not typically backed by the U.S. government but are insured through private organizations. They are carefully regulated for member safety, and members are still protected just as strongly as banks and other credit unions are.
The Cons of Credit Union Membership
While credit unions are similar to commercial banks in many aspects, they are not identical. Understanding all the pros and cons of credit unions, and especially the cons can help prospective members decide on the best type of financial institution for their money.
1. Potential membership fees and restrictions
When joining a credit union, prospective members might have to pay a small membership fee, which can range from $5 to $25. They might also have a minimum deposit requirement, which must remain in a special account as long as they remain with the credit union. While these fees are usually quite affordable, they can be off-putting for some prospective members.
According to the Federal Credit Union Act of 1934, credit unions are also required to limit membership according to certain defined groups.
This means that most credit unions can be restricted to a particular area, fraternal organization, business affiliation, college or university, or religious group. Those who are not affiliated with those groups or who do not live in those areas might not be eligible to join.
However, membership requirements are typically broad, with criteria including:
- Specific locales
- Colleges and universities
- Groups, churches, and fraternal organizations
- Employers and unions
- Service members, veterans and civilian members of military bases or posts
- Federal credit unions
People may also be eligible to join if they have a family member who is already a member.
2. Limited locations
The small, community-focused nature of credit unions means that members may have few options for banking when they travel. They are restricted to a few branches and ATMs in a small locale.
When traveling, members might have to pay a premium to access their cash through ATMs belonging to other banks or organizations. This can be both expensive and inconvenient.
Online banking services can mitigate this issue, however, and can make it easier for members to access their accounts whenever and wherever they need.
At 121 Financial Credit Union, we make it easy to do your banking wherever you are with our convenient online banking system.
3. Some service restrictions
Large commercial banks have access to extensive funds from numerous depositors, and that gives them the ability to offer more services to their customers.
Credit unions offer many competitive products and services, but they often lack the funding to provide the same big-ticket items that banks do, such as large commercial loans.
Still, for most everyday consumers and day-to-day needs, credit unions will have everything most people need, such as personal loans, mortgage loans, home equity lines of credit, credit cards, checking accounts, savings accounts, retirement accounts, and even student loans.
Some credit unions are also lacking when it comes to technology. They might not offer mobile apps or online banking, which means that members must go into a branch or find an ATM to do their banking. This can be inconvenient for those who prefer to do their banking on the go.
Is a Credit Union Right for You?
Credit unions have a lot of pros, but they might not be the right fit for every user. The ideal credit union member is someone who needs the basic services they offer. They need an account in which to deposit their paychecks and from which they can pay bills or make purchases. They might appreciate the convenience of the personalized service and the affordability of reduced interest rates on loans and credit cards, too.
For those who travel widely and want to avoid paying ATM fees and people who need access to national branches, a larger bank might be a better option.
The 121 Financial Credit Union Difference
At 121 Financial, we focus on our members with products and services that are designed to meet your needs, including:
- Low or no-fee banking products
- High-yield deposit accounts
- Low-interest loan products
- Low APR credit cards
- Reduced rate insurance
- Free retirement and investment planning
- Free financial and debt counseling
- Financial seminars
- Career fairs
- In-branch events, giveaways and member days
You might be eligible for membership if you live, work or attend school in one of the following areas, including:
- Duval County
- Clay County
- St. Johns County
- Nassau County
- Baker County
- Columbia County
- Union County
- Bradford County
- Alachua County
- Putnam County
- Flagler County
You might also be eligible for membership if you are a current or retired member of a telecommunications company or if someone in your family is already a member.
Check out 121 FCU today to learn more about everything we offer or join our family of members!