What is a Credit Union?

What is a Credit Union?

A credit union is a not-for-profit financial cooperative that is owned by its members, who contribute to the credit union's pool of deposits and gain access to its financial services. Credit unions offer the same types of services as banks, including checking and savings accounts, certificates of deposit (CDs), loans, mortgages and more.

How Credit Unions Work

Most people who haven't been part of a credit union have been customers at a bank, and since you will likely be choosing to do business with one or the other, we can start with a quick head-to-head comparison.

Credit Unions
MembershipRestricted field of membership based on region, occupation, employer, association, etc.Open to anyone who can meet deposit requirements
Organizing PrincipleServices, rates and fees geared to benefit membersServices, rates and fees designed to maximize profit
Investment and DividendsConservative investment strategies, with occasional dividends to membersInvestments designed to optimize asset growth, with dividends distributed to shareholders
Services and ATMsSlightly smaller range of services, with reliance on third-party ATM networksBroad range of deposit, loan and investment options, with national ATM and branch networks
Deposit InsuranceDepositors insured up to $250,000 by National Credit Union Administration (NCUA)Depositors insured up to $250,000 by Federal Deposit Insurance Corporation (FDIC)

Unlike typical bank customers, the members of a credit union have some influence in the projects and investments pursued by the credit union. They also vote each year to select a volunteer board of directors to manage the day-to-day operations of the institution. Though most credit unions ask for resumes reflecting relevant experience in finance or management, theoretically, any member in good standing can be nominated. When combined with the lack of profit motive, the direct accountability of credit union management to their members tends to make credit unions more lenient and flexible than banks.

Benefits of Credit Unions

The clearest advantage of credit unions are the lower fees and higher interest rates they provide on their account services, in both checking and savings. Also, loans given out to credit union members come at lower APRs than typical bank loans. Product for product, the options available to credit union members will usually cost them less and earn them more than the equivalent choices available at regular banks. Some credit unions even offer credit cards at highly favorable rates compared to the rest of the market.

For example, according to a December 2015 report by the NCUA, the average 1-year CD rate for deposits $10,000 or less stood at 0.47% among US credit unions and 0.38% among US banks, and the current average among the 20 largest credit unions by total deposits is even higher, at 0.69%. Even though interest rates are at historic lows, as long as you have to store money somewhere, choosing a credit union over a bank can help you squeeze as much as possible out of an unfavorable situation.

One benefit exclusive to credit unions is the possibility of receiving dividends. If a credit union's investments perform well, it will sometimes issue dividends to its members, who are considered the collective owners. Similar to the proportional distribution of bank dividends based on shares, credit union dividends are typically distributed based on the size of a member's deposits with the union.

In general, the benefits of a credit union can be described as extremely local: if you care about playing a more active role in your community and in receiving personal attention in your financial experience, a credit union may be the place for you.

Credit Union Membership Requirements

The first and highest hurdle to joining a credit union is the difficulty of finding one that will let you apply. A credit union's "field of membership", which determines the kinds of people who are allowed to join, can get extremely specific. The League of Mutual Taxi Owners in Manhattan, for example, draws a map of member-eligible neighborhoods that loops between and around specific blocks of the city, so that living on the wrong side of a street can disqualify you. As tax-exempt organizations, credit unions are required by law to define and restrict their membership by location, profession, religion or fraternal association.

However, several major credit unions offer simple workarounds to the membership barrier. Pentagon Federal Credit Union, for instance, allows you to join a participating charity to gain the "bond of association" that legally defines its membership. By paying one-time dues of $14 or $15 to Voices for America's Troops or the National Military Family Association, you become eligible to join a credit union that ostensibly caters to members of the armed services and Pentagon employees.

Talk to your human resources representative at work to find out if your company has an associated credit union for its employees. Most credit unions also allow family to join through existing members, so you may want to check with your relatives to find out if there are any credit union members. The degree of relation required may vary, but referral is often limited to "immediate" family: parents, children, siblings, spouses and grandchildren or grandparents. Other places to check would include your place of worship or even your neighbors, who may know of a community credit union serving your area.

If you are starting from scratch, the National Credit Union Association (NCUA), the federal agency which manages the insurance fund for US credit unions, offers advice on how to find a credit union in your area. You can also start your search with the large credit unions, whose applications sometimes point you to an association you can join quickly and for free. Once you become a member of such a group, you nominally satisfy the bond of association that defines a credit union's field of membership. This legal workaround accounts for much of the rapid and broad growth in membership enjoyed by the largest credit unions. However, many of the qualitative advantages that the credit union system enjoys over commercial banks have to do with their smaller scale.

Large vs. Small Credit Unions

Credit unions come in all sizes, from multi-billion-dollar giants like Navy Federal to local unions that count their membership in the dozens. Small credit unions excel at providing an attentive, personalized service experience, since their resources can be focused on a much smaller group of members, and as institutions they also tend to focus on their immediate communities.

Larger credit unions resemble large banks, offering a diverse selection of services and a national web of service locations. If you travel often and require frequent ATM services, an all-inclusive credit union with national reach like PenFed may be your best option.

However, as a credit union grows larger, it begins to take on the negative aspects of large-scale operation along with the benefits. The American Customer Satisfaction Index (ACSI) notes that as US credit union membership surpassed 101 million over the past 4 years, consumer satisfaction with credit unions declined continuously, implying that overcrowding has lowered the quality of the individual member experience.

Of course, small credit unions face their own problems on the opposite end of the spectrum. They may have fewer experienced professionals on their management teams, have trouble providing consistently high-quality services, or be limited in their geographic reach. To address this third issue, smaller credit unions usually choose to join larger networks of ATM providers, such as CO-OP, so that their members have a reasonable amount of access wherever they go.  

Despite these efforts, you are still more likely to face ATM usage fees with a small credit union if you travel too far. Getting to networked ATMs requires some searching, unlike the ubiquitous ATMs and branches run by national banks, and in a pinch, you may be forced to use a non-network ATM.