A credit union is a financial cooperative that offers traditional banking services to its members. Credit unions can be small, volunteer-only operations or large entities comprising of thousands of participants across the country.
Created, owned and operated by their participants, credit unions are not-for-profit enterprises with tax-exempt status and can be formed by large corporations, organizations or other entities for the benefit of their employees and members.
How a credit union works
A credit union follows a simple business model. Members of the credit union pool their money, by buying shares in the cooperative, to provide loans, demand deposit account and other financial products and services to each other.
The income generated from a credit union is used to fund projects and services that benefit the community and the interests of its members. Any earnings are exempt from corporate income tax.
Credit unions have less brick and mortar locations than traditional banks, which can be a drawback for members who prefer an in-person service and also offer less options than a traditional bank. But they can offer their members better rates and more ATM locations due to not being publicly traded.
Traditionally, membership of a credit union required a common bond, either working for the same company, within the same industry or living in the same community. But in more recent years credit unions have relaxed these requirements to allow the general public to become members.
To become a member of a credit union, you must open an account, once you have an account you become a member and a partial owner. You will participate in the union’s affairs; you will have a vote in appointing the board of directors as well as other decisions relating to the union. Each member gets an equal vote, meaning it is not based on how much money is in their account.
Once you are a member you can then access the services they offer, these may include loans, savings accounts, ISAs, prepaid debit cards, insurance products and in some cases mortgages.
Benefits of credit unions
The advantages of credit unions include:
Offer better rates
Credit union members can often get better interest rates on loans than those that are offered by traditional banks. They also offer higher interest rates on accounts, meaning members can earn more on their deposits.
In addition to better rates, credit unions also offer lower fees than commercial banks. In most circumstances, it will cost members less to have an account with a credit union than it would at a traditional bank.
Pays dividends and gives voting rights
As a member of a credit union, you will receive dividend payments and have voting rights that enable you to have your say on important decisions about the credit union.
Drawbacks of credit unions
The disadvantages of credit unions include:
Membership fees and minimum deposits
When you join a credit union you will have to pay a membership fee and also make a minimum deposit amount. Membership fees can vary across credit unions but are typically between $5 and $25, the minimum deposit amount can also vary depending on the credit union.
Not all are insured
Not all credit unions are insured, some are insured by NCUA but others may not be so it is worth doing your research when looking for a credit union to minimise any risks of placing your money in a credit union account.
Fewer services and limited branches
Credit unions have fewer branches than traditional banks which can be off-putting for members who prefer in-person services and face-to-face advice. They also offer less services than commercial banks owing to their size and the funds they have access to.