Most major financial institutions fall into two categories – credit unions or banks.
What is the difference between a credit union and a bank?
Essentially, a credit union is a nonprofit banking institution, while a bank is a for-profit institution.
A credit union has one role, which is to serve its members. Members are the union’s depositors, and the union is obligated to pay them dividends.
On the other hand, a bank is a for-profit institution. Whether you’re their customer or not, a bank will pay you dividends or declared earnings, as long as you’re a stockholder. Banks are there – fundamentally – to make a profit.
Another difference between the two is their membership. While a credit union operates locally and has fewer members, a bank can accommodate any member of the public interested in their services.
If you’re considering joining a local credit union, it may be helpful to understand the advantages and disadvantages of these financial institutions.
Remember, you’re investing money there, and it’s only after weighing the rewards and drawbacks of a credit union carefully that you can make an informed decision.
7 key advantages of credit unions
There are several pros and cons of credit unions:
A credit union gives you ownership
Once you open an account with a credit union, you’re not just their customer. You’re a member who owns shares in the union.
This makes the structure of credit unions very different from banks. With no stockholders, the union’s main aim is to please its members.
Remember, credit unions adopt a nonprofit model, meaning their focus is not primarily on generating as much profit as they can. Instead, they channel all their efforts towards giving the best customer service possible to their members. In simple terms, they have a very customer-friendly policy.
Once you’re a credit union member, you’re entitled to participate in elections for the board of directors. This means you could indirectly influence major decisions, including the introduction of new products or services.
Ownership also comes with financial benefits, the most significant being earning bonus dividends. These are usually deposited in accounts at the end of every year. In addition, a credit union may be more likely to be forgiving if your credit rating is lower or if you overdraw your checking account.
You often get lower rates on credit cards and loans
Credit unions offer lower interest rates on loans and credit cards than banks, therefore they may save you money in the long run.
Remember, credit unions aim to offer the best customer service, not simply to make profits. In fact, there are credit unions that even consider members with poor credit scores, and work with them to make sure they get a loan that best suits their needs.
Interestingly, some credit unions have even gone so far as to set a limit on charging interest. That means that for people looking to buy homes or cars who have a bad credit rating, a credit union may be an ideal option as they charge lower fees.
It’s often easier to qualify for credit
Although credit unions have rules regulating who can join or qualify for certain loans, they’re generally much more forgiving than banks.
Once you join the institution, you automatically become a member for life. This means you can operate a checking account, make an application for a credit card, or borrow money.
To qualify for a loan with credit unions is often easier because, unlike banks, if your credit history is bad, they may still give you a loan at a lower rate. Even in situations where you might face financial difficulties, credit unions usually aim to work with you to see what can be done to help you qualify.
You may get better returns on saving accounts
Credit unions often offer higher returns on deposits in savings accounts, money market accounts, a Certificate of Deposit, and IRAs, than banks do. They manage to make the interest rates low because they are non-profit institutions. Any surplus funds they get go directly to their members.
What’s equally remarkable about credit unions is that their accounts are just as secure as those operated by commercial banks, despite the high interest rates. That’s because credit unions insure their member accounts too.
Credit unions offer community-oriented finance
Credit unions may be smaller than most banks, but this is also what makes them special.
The institutions are run by members of a specific community or workplace. Subsequently, they benefit the whole community at large.
In fact, most credit unions require members to belong to a particular occupation, place, church, or geographical location. This gives them a unique community feel that you might not find at a large banking corporation.
You’ll usually get better service
You can usually expect credit unions to offer better services to their customers than commercial banks. That’s because these organizations are smaller than most banks, meaning it’s easy for their staff to get to know their customers better. This is pretty likely to translate to them being more attentive to their customers’ needs.
Additionally, credit unions aim to benefit every community member and to please their customers, making good customer service a must.
They educate their members
Besides offering financial services to their members, credit unions also engage in educating them. One goal of credit unions, in general, is to better equip their members with knowledge on credit matters and money management.
To this end, from time to time, credit unions will hold financial workshops and invite financial advisors to provide guidance to their members.
Interestingly, some credit unions will not only focus on economics. For example, the Communication Federal Credit Union (CFCU) conducts women’s defense classes to help women learn to defend themselves.
What are the Disadvantages of Credit Unions?
Before you decide to switch to a credit union, you may want to consider the following possible disadvantages:
Finding an ATM connected with your account can be tough
Credit unions are smaller entities. For this reason, they tend to have a limited number of ATMs, and the few that exist are often only found in their branches.
The limited ATMs are because the money they make is not sufficient to set up ATMs all across the US.
On the other hand, large banks have ATMs spread out all over. While you can still withdraw from their branches, they often charge very high fees for non-members to use them.
There’s an upside to the lack of ATMs, as many credit unions will reimburse the fees that other ATM branches typically charge for their use.
Credit unions may have fewer locations
Credit unions may be a big disappointment to customers who prefer having branches spread out in every corner of a town or community. That’s because their size limits them to only establishing a few branches and only within a given geographical location.
For members who constantly travel, this can be a challenge. This is why it’s often worth considering your individual needs before choosing a bank or credit union.
Credit unions offer exclusive membership
Credit unions are exclusive. Most will cater only to a specific group of people, mostly belonging to a particular profession or community.
For example, a credit union like the San Francisco Federal Credit Union only accommodates individuals who live, work, or worship in San Francisco. Similarly, the State Employees’ Credit Union is only open to employees of the state of North Carolina.
Some credit unions have poor technology
Because credit unions are nonprofit institutions, they often don’t have enough funds at their disposal to invest in technology in the same way that larger banks are able to. In most cases, their members have no online access to their accounts and no mobile apps.
We’re living in a world where technology is at the center of many of our day-to-day engagements. Therefore, the lackluster technology that credit unions offer is one thing they might want to strive to improve on.
Therefore, when considering whether or not to invest your money in a credit union, you may want to find out if they have a website or mobile banking app for you to utilize.
Credit unions may offer fewer services and options
Commercial banks have the financial strength and workforce to offer a variety of products and services to their customers. Credit unions, on the other hand, might have been improving in terms of the number of services they offer, but they still have a long way to go.
For instance, a person in need of funding from a large loan may not be able to get it from a credit union, and a bank might be a better option.
Get started with sustainable banking today
It’s worth noting that the products credit unions offer are no different from those provided by banks.
However, the way that you invest your money can also have an impact on the environment.
Many banking institutions employ unsustainable and unethical ways of investing customers’ money in attempts to profit shareholders, without much consideration to the environmental impact.
On the other hand, when you open an account with a credit union, you own shares and contribute to decision-making. For this reason, credit unions tend to have a much smaller environmental footprint than banks!
For more information about green financial institutions, check out Aspiration.