Maybe you’re frustrated with getting hit with high monthly fees each month, or maybe you feel like you’re not earning a satisfactory interest rate. Perhaps you’re just ready to entrust someone other than a bank with your money. Whatever the reason, there may come a time when you begin to look at credit unions. There are major differences between the two, and you should know what to expect if you make the switch. To help weigh the pros and cons, here is a know-all guide to credit unions.
What is a credit union?
A credit union is similar to traditional banks in a big way: They both offer financial products to customers. Credit union members have access to all of the same products that bank customers do, such as checking and savings accounts, CDs, loan products, and credit cards, per Money Crashers.
That’s where the similarities end. A big difference between the two is that a credit union is a not-for-profit institution. Because credit unions operate that way, they’re able to usually offer you higher interest rates on savings accounts and CDs, as well as lower interest rates on loan products and credit cards.
Another difference — which also works to your benefit – is that credit unions are member-focused institutions. It’s a cooperative, meaning it’s owned and operated by its members, rather than being owned by stockholders (like a bank). Once you make an initial membership deposit, it makes you part owner of the credit union, automatically giving you a say in the credit union’s decisions, according to Money Crashers.
Because it’s set up that way, potential members have to meet membership requirements that vary depending on the credit union’s goals and objectives. “For example, a corporation’s credit union may only accept employees and their immediate family members. A credit union for teachers, on the other hand, may accept any teacher who works for a certain school district. A few credit unions have more relaxed requirements and may simply request that members live in a certain city or area,” writes Money Crashers.
The pros of credit unions
First, you can expect to see much lower minimum balance requirements, according to The Huffington Post. In fact, while some banks require high minimum balances and then charge you high fees if you fall below the minimum, credit unions do the opposite. Typically, they have a very low balance requirement – it can be as low as a $5 to $10 minimum deposit.
You can also expect to find lower interest rates at credit unions. Bankrate writes that credit unions are often able to offer customers higher rates on savings accounts and lower rates on loans and credit cards. Hoping to find someplace with lower fees, too? Credit unions can also offer that. “In fact, many offer checks, withdrawals, and electronic transactions free of charge. Many also offer checking accounts with no minimum balance and without a monthly account servicing charge. That could save you hundreds of dollars a year. Credit unions do charge bounced check and overdraft fees like traditional banks, but the amount is typically less,” Money Crashers reports.
Credit unions will also provide you with great service. As a not-for-profit organization, its main mission is to provide members with affordable services, writes Bankrate. “That mission leads to very satisfied members, too. In the most recent Prime Performance Bank and Credit Union Customer Satisfaction Survey, credit unions beat banks in all categories, with customers rating their overall satisfaction at a new score of 89 percent, seven points greater than the industry average,” says Bankrate.
There’s also a little bit more flexibility. So if you have had any problems with credit or employment in the past, you may have a better shot at a credit union. Because banks process a ton of applications each month, it’s a streamlined process that only takes into consideration income, credit scores, and deposits, according to Money Crashers. Credit unions, on the other hand, can be more willing to work with you regardless of your history because they’re smaller and member focused.
And your money will be just as safe at a credit union as it is at a bank. The Huffington Post reports that you’ll receive the same amount of protection at a credit union — you’re insured up to $250,000.
The cons of credit unions
Often, branch and ATM locations can be pretty limited, says Forbes. Many credit unions only operate in one location. And while that community-based focus is a positive, it can also work as a disadvantage when you’re looking for a nearby ATM. Having said that, most credit unions usually have an online portal that allows you to bank from anywhere as long as you have an Internet connection. Many also belong to shared ATM networks, which eliminates the issue entirely, per Go Banking Rates.
Their services can also have more limitations, as well. According to Money Crashers, while many banks offer several different types of checking and savings accounts, as well as a variety of credit cards, loans, and investment products, credit unions may not have as much to offer. They typically offer all of the same things but just don’t have as many options for each, meaning there’s less freedom.
Remember, the membership we talked about? While that helps credit unions provide great service, it can also work against you. Here’s why: Consumers can’t just open an account at any credit union (like you can with banks). Consumers must first meet certain membership requirements, which can include employee groups, associations, religious or fraternal affiliations as well as residential areas, according to Bankrate.
Finally, if you’re a tech-savvy person who wants the latest technology available in the banking world, you may not get that with a credit union. The bigger banks have greater resources to apply toward investments in emerging technologies, such as apps. Credit unions may have technology, but it probably won’t be the same as what you’d get at a larger bank.