Picking the right bank for your money can feel like a complicated task. There are so many options to consider and not a lot of points of differentiation between industry leaders.
Credit unions are an alternative to traditional banks that could be a good fit for you. But in order to make that call, you’ll probably want some more information.
That’s why we’ve put together this article. It dives into the pros and cons of credit unions to help you figure out whether one is right for you. Keep reading to learn more.
Features of a credit union
Credit unions are financial cooperatives that provide banking services.
They are nonprofit organizations that are owned collectively by their members. The main goal of a credit union isn’t usually to make money but to offer excellent banking services to its members.
Credit unions tend to have the following characteristics:
- Strong interest rates
- Lots of ATM locations
- Relaxed eligibility requirements
- Superior customer service
- Relatively few brick-and-mortar locations
- Not as many online and mobile services as other financial institutions
Credit unions VS banks
Banks are for-profit financial institutions that are generally larger than credit unions. They tend to provide more services, more brick-and-mortar locations, and more convenience to their customers.
However, a bank’s primary focus tends to be making money. Their rates and some of their services may not be as favorable towards consumers as what credit unions offer because of this.
That being said, there are different pros and cons to using banks and credit unions. Neither option is likely the best fit for every person. Instead, it can be helpful to understand what you need and want from your banking institution to determine which option is right for your needs.
Pros of credit unions
Better interest rates
One of the biggest reasons to choose a credit union over a bank is the opportunity to get better interest rates. There are two ways that most credit unions beat most banks when it comes to interest rates.
First, credit unions tend to pay their members a better percentage on saving accounts. This means that the money that you hold at a credit union will often make more than the money you hold at a traditional bank.
Second, credit unions often offer lower loan rates. So if you want to buy a home, take out a personal line of credit, or purchase a new car, then you may pay less to borrow that money if you get it from a credit union–especially if you’ve been a member for a while and have built a relationship with the credit union.
Less rigid eligibility requirements
Credit unions exist in many different forms. Sometimes you need to be a member of a particular community to join one, such as the Armed Forces or a certain church. However, other credit unions will accept everyone who lives in a particular area.
This means that overall, the requirements for joining a credit union are low. You should be able to find one that fits your needs and will accept you, almost regardless of your current life situation.
Better financial literacy resources
Credit unions tend to place more of an emphasis on educating their members and helping them build financial literacy. They do that by investing more of their resources into creating robust financial literacy resources.
For example, many credit unions offer seminars on things like:
- Preventing identity theft
- Managing credit cards
- Buying a home
- Answering common financial questions
The other thing to keep in mind here is that credit unions tend to provide a more human touch than banks. When you’re a member at one, it’s often easier to get in touch with someone who can answer your questions and walk you through an important financial move from start to finish.
Credit unions don’t have to worry about keeping any shareholder happy. And they don’t have to pay any income tax either. That means they can do things with their excess cash that traditional banks generally can’t.
One of the most common ways that this benefits consumers is that credit unions tend to have lower fees than banks. This is one of the ways that credit unions pass their savings on to the community. Providing better interest rates is another example of this.
The bottom line is that it usually costs less to have an account with a credit union than a traditional bank. That could be reason enough alone to make the switch if you’re fed up with your bank’s fees.
Credit unions are community organizations in a way that national banks will likely never be able to match.
You aren’t just a customer at a credit union, you’re a member. And that makes you a part-owner of the organization. You may receive dividends in the form of better interest rates and potentially even voting rights, depending on the nature of your credit union.
Additionally, credit unions are based in specific communities. This tends to make them more committed to supporting that community through things like financial literacy training and providing better banking experiences.
So if you want your banking to have more of a community feel to it than it does now, then swapping to a credit union could be just what you need to make that happen.
Superior customer service
You can also generally expect to get better customer service from a credit union. This is because they are mostly smaller organizations that serve fewer customers. Customer service agents at credit unions get more of a chance to build relationships with the people they help than they do at traditional banks.
There’s also something about the community-based nature of credit unions that seems to promote superior customer service. Agents may be more motivated to provide excellent support when they know they’re helping someone in their community.
Profits returned to members
Perhaps the best part of using a credit union is that any profits that your union makes will go back into the pockets of its members. These are generally paid out in the form of dividends, stronger interest rates, and lower fees.
This is quite different from what happens with traditional banks, which tend to focus on providing their shareholders with a better return–not their customers. This fundamental difference is why many people prefer using credit unions.
Cons of credit unions
Though there are many good reasons to choose a credit union, there are also some disadvantages to doing so. We’ll cover those in this section.
May not be insured
Traditional banks insure their users’ funds through the Federal Deposit Insurance Corporation (FDIC). This is an independent agency of the United States government that protects people from losing money. It’s backed by the strength of the U.S. government.
Many credit unions offer a similar type of insurance to their members but through the National Credit Union Administration (NCUA) instead of the FDIC. This is also an independent government organization that’s backed by the strength of the U.S. government.
However, the NCUA doesn’t provide insurance to every credit union in the country. If you pick a smaller, or a state-chartered credit union, then it could be insured through a private company instead of a governmental organization. This adds an element of risk to some credit unions that is never a problem for banks.
The biggest banks invest millions into their online and mobile services. By doing so, they create a robust suite of services that make interacting with the bank incredibly convenient.
Most credit unions nowadays also have online and mobile services, but they may not have the same amount to invest in these products as traditional banks.
That’s why one of the most common complaints about credit unions is their lack of services. If these are really important to you, then you may want to either pick your credit union carefully or stick with a bank.
Credit unions generally only operate in a particular area. So if you leave that area, then it can start getting challenging to interact with the institution.
For example, if you belong to a credit union on the East Coast, you typically won’t find ATMs and brick-and-mortar locations for it on the West Coast. That means you may have to pay more ATM fees and won’t be able to deal with the institution in person.
So if you’re not tied to the same geographic location that your credit union operates in, then you’ll either need to get comfortable with the ramifications of that or pick another option.
Aspiration lets you support the planet while simplifying your banking
Credit unions and traditional banks aren’t your only option. You can also look into opening an account with a neobank like Aspiration. We empower our customers to take a stance against climate change with their finances.
We do that by offering the following benefits:
- Reforest the planet by making everyday purchases
- Use 55,000+ ATMs fee-free
- Get paid 2 days early
- Up to 20x higher interest than traditional banks
- Save up to $300 per year in fees
Interest in learning more about Aspiration? To learn how you can protect the climate with your money, or to sign up for our carbon-neutral Aspiration Zero credit card, check our Aspiration today.