Credit Unions are not-for-profit organizations. They are member-owned and were set up for those who share certain aspects in common such as working in the same industry or living in the same neighborhood.
Members of credit unions have access to the same services and products you would expect to find at a bank. These include savings accounts, checking accounts, money market accounts, and share certificates.
These are what credit unions name their certificates of deposits. This is why many people think of credit unions and banks as somewhat interchangeable financial establishments. While they both offer similar services, the way in which they operate varies significantly.
One main difference between credit unions and banks is that commercial banks are for-profit institutions. They pay dividends to their stockholders whereas credit unions pay dividends to their members and are not-for-profit.
It’s important to understand the pros and cons of using a credit union to see if it’s the right option for you and your needs. So, in today’s article, we will be discussing the advantages and disadvantages of credit unions. We hope this article will answer any questions you may have and clear up any possible misunderstandings when considering credit unions.
The Disadvantages Of Credit Unions
We’d usually begin with the pros of credit unions but let’s get the disadvantages out of the way first.
There are few key cons to consider before thinking about joining a credit union. These are:
- You must be a member - It is not possible to open an account or take out a loan in any credit union without joining the financial institution first. Because the majority of credit unions consist of members who share certain factors in common, you will have to meet certain criteria and be eligible to even be considered for membership. However, it can sometimes be as easy as depositing $5 into a savings account to become a credit union member.
- Potential membership fees - This leads us to the fact that some members may have to pay a small membership fee, ranging from $5 to $25 to join. Some credit unions also require a minimum deposit amount which has to stay in a special account for as long as you’re a member of the union.
- Restricted accessibility - Many credit unions have fewer branches than commercial banks. Therefore, for those who travel regularly or prefer in-person banking, this can become an issue. Even when you find a credit union, it still may not offer all the financial services you require at that time depending on where you are.
- Higher APYs offered by online banks - Some online banks may have better deals when it comes to APY(Annual Percentage Yield) on a CD or savings account. Larger banks tend to have more access to extensive funds from multiple depositors. This gives them the ability to offer more services and better rates than many credit unions.
The Advantages Of Credit Unions
While there are some obvious disadvantages of joining a credit union, there are also some significant advantages to consider too. Here are just some of the main pros of credit unions:
- Low fees - Credit unions differ from most commercial banks as they do not pay federal taxes. This is because they are not-for-profit organizations. This means you may be able to secure a product or service that charges much lower fees.
- Profits get returned to the members - Remember, members of credit unions are also shareholders. This means that any profit made by the union goes back to them. If you need to take out a mortgage or another type of loan, you may be able to lock in a lower rate at a credit union when compared to a bank. Furthermore, it’s more likely that you can earn higher yields on share certificates or your savings accounts.
- Excellent customer service - In general, credit unions are regional or local. Therefore, you would usually enjoy a more personal, individualized experience than dealing with a bank. The staff is local and in smaller numbers and are far more member-focused than profit-focused. Staff can help guide members with their personal needs and even help sign them up for different programs and seminars to become more financially literate. Banks, on the other hand, are more profit-oriented. Of course, they want to keep their customers happy but, at the same time, they also want to maintain a healthy bond with their stockholders.
- Your money is very safe - The National Credit Union Administration operated the National Credit Share Insurance Fund which insures your deposits of up to $250,000.
- You become a member - When you join a credit union, you automatically become a member of it rather than a customer. As a member, individuals receive many benefits including part ownership and dividends. Moreover, members also get voting rights meaning they have a final say in many important credit union decisions such as the election or dismissal of board members, helping amend or adopt bylaws, and a say in establishing or terminating shares or membership. And the deposit amount doesn’t matter. However big or small your deposit is, you will have an equal say in how the union is run.
Credit Unions VS Banks: Wait’s The Difference?
Credit unions and banks may offer some of the same products and services but there are some key differences.
Firstly, banks are for-profit institutions. Therefore, they have to pay federal taxes. Because credit unions are not-for-profit, no taxes are required to be paid.
Another difference is that banks are run by shareholders whose main goals are to maximize profits. Credit unions, on the other hand, return all of their profits to the members by offering higher rates on different deposit products and/or charging lower rates on loans.
Finally, banks are open to everyone. Anyone can walk in and access its services without joining. You must become a member to use a credit union’s services.
We hope this has helped you understand credit unions a little better. If you like the idea of forming a close-knit relationship with a financial institution, then credit unions may be the best option for you. Weigh up the pros and cons before making any final decisions.