Understanding Credit Unions and Their Benefits

Credit unions are not-for-profit cooperatives that offer a community-focused alternative to commercial banks. They provide their members with a range of financial products and services, typically at lower fees and with better interest rates to borrow money.

Unlike commercial banks, which aim to generate profits for shareholders, credit unions prioritize the financial well-being of their members and neighborhoods. This often results in lower interest rates on loans, higher savings account rates and reduced service fees.

Understanding credit unions' benefits can help you decide on the most suitable financial products and services, such as personal loans and credit cards.

Key Takeaways

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Credit unions compete with banks by reinvesting profits to members, resulting in lower interest rates.

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Credit unions typically have stricter membership requirements than banks, such as membership in a specific college, place of worship or regional community.

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Similar to banks, the National Credit Union Administration (NCUA) insures credit union deposits up to $250,000.

What Are Credit Unions?

Credit unions were first established in America in 1901, with an initial deposit of just 10 cents. They were created to provide affordable financial services to their members, emphasizing cooperative principles and community support.

Credit unions are member-owned financial cooperatives that exist to serve their members rather than to maximize profits. They typically offer more attractive terms than banks, such as lower fees and better interest rates. Most of the profits that credit unions generate are reinvested back into the institution or distributed to members.

Generally, you’ll have to meet certain requirements to join a credit union, such as working for a particular employer, having a family member who already belongs to the union, living in a specific geographic location or belonging to a particular place of worship, school, labor union or homeowners' association.

Ask the experts:

What are some reasons people should sign up for a credit union?

Book Author at Your Total Wealth

Many credit unions will offer you a higher rate of return on your checking account, liquid savings account, term certificates of deposit, and other savings products. Savings are insured just like your savings are insured when deposited in a bank. Many credit unions will offer you a lower borrowing rate for just about any type of loan, including loans to buy or refinance a home, a car, a credit card or just an ordinary personal loan. Many credit unions will work with you more “forgivingly” if you borrow and are having trouble repaying your loan.

Credit unions often offer other perks of membership. You may find that your credit union provides more personalized service than a bank. Once you have paid your membership fee (often just $5; my advice is to never pay more than that as a one-time fee to join), there are no downsides to being a credit union member. You can quit anytime. When seeking a place to save or to borrow, investigate the terms offered by the credit union you join and compare those terms to those offered by banks. You may find that the products and services offered by your credit union are better than those offered by banks.

Founder & CEO of David Aylor Law Offices

Credit unions make the most financial sense for your average Joe. Their nonprofit nature allows them to charge lower interest rates on any credit and loan services, and even account fees are less than most local and online banks. If you're looking to save money with simple banking, a credit union is your best bet.

Associate Professor & Director of the Financial Planning Program at Missouri State University

Credit unions are owned by and managed in the interests of their member-depositors; they also make loans to these same members. Additionally, credit unions are not-for-profit organizations. As a result, credit unions may be able to operate on a smaller “spread,” which is the difference between the interest rates they pay their depositors and the rates they charge their borrowers. This can allow credit unions to pay their depositors higher-than-average rates while charging borrowers lower-than-average rates.

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How Credit Unions Work

Since credit unions are member-owned institutions, each member has a say in governance, usually exercised through voting rights. Members vote and elect a volunteer board of directors to serve the credit union. Members also assist one another by ensuring their mutual financial health. For example, if a member needs a loan, another member’s savings become the funds for a home or auto loan.

Profits are returned to members through lower fees, better interest rates and dividends. The National Credit Union Administration (NCUA) oversees a unique insurance fund for credit unions, ensuring deposits up to $250,000.

Types of Credit Unions

There are various types of credit unions tailored to different demographics and member needs. For example, credit unions for college students will have different requirements — and benefits — compared to military or federal credit unions. Below, we highlight some common types of credit unions and the populations they serve:

  • Federal Credit Unions: Serve members across the United States.
  • College Credit Unions: Serve students, faculty and alumni of specific educational institutions.
  • State-Chartered Credit Unions: Serve specific local or regional communities and are regulated by state authorities.
  • Employer Credit Unions: Serve employees of particular companies or organizations.
  • Military Credit Unions: Serve military personnel, veterans and their families. Such credit unions are well-versed in federal programs like VA loans, so there tend to be faster processing times.
  • Community Credit Unions: Serve residents of specific geographic areas.

Consider if there may be a type of credit union that fits your specific profile, depending on your circumstances and needs.

Products and Services Credit Unions Offer

Credit unions offer their members a wide range of financial products and services. These services can extend to individuals, joint accounts or businesses.

Auto Loans

Credit unions offer auto loans for new and used vehicles. These loans typically come with competitive interest rates and flexible repayment terms. As of the first quarter of 2024, the average rate for a new car loan from a credit union was 6.4%, and for a used car loan, it was 6.46%, according to the NCUA.

Benefits of credit union auto loans include lower interest rates compared to traditional banks, personalized customer service and more flexible approval criteria.

Credit Cards

Credit unions offer credit cards in partnership with major companies like Mastercard and Visa. These cards often come with competitive interest rates and member-focused benefits. As of the first quarter of 2024, the average interest rate for a credit card from credit unions was 12.86%, compared to the average rate of 24.37% for traditional cards.

Debt Consolidation Plans

Credit unions provide debt consolidation loans, which can help members manage multiple debts by combining them into a single loan with one monthly payment. These loans may offer more favorable terms compared to other lenders, including lower interest rates and more flexible repayment options.

Note that federal credit unions have an interest rate ceiling of 18% for loans, which can make these loans a more affordable option for debt consolidation.

Deposits

Credit unions allow members to make deposits, often with no monthly fees or minimum balance requirements. However, some transactions may incur fees, so reviewing the terms is important.

Mortgages

Credit unions offer a variety of mortgage options to meet their members' diverse needs. These can include conventional mortgages, government-backed loans and special programs for first-time homebuyers.

Some credit unions even offer unique mortgage products, such as mortgages that allow you to buy a home without making a down payment. Other institutions offer down payment assistance grants to help make homeownership a reality for those with less savings.

Personal Loans

Credit unions also offer personal loans, which you can use for a variety of purposes, from consolidating debt to financing a large purchase. These loans typically come with competitive interest rates and flexible repayment terms.

Credit unions offer a wide range of loan amounts. Personal loans can range from as little as $500 to as much as $100,000. For example, Alliant Credit Union offers personal loans up to $100,000, providing substantial flexibility for borrowers.

Pros and Cons of Credit Unions

Before joining a credit union, you should understand its benefits and drawbacks — especially compared to commercial banks that may offer similar services.

Pros of Credit Unions

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    Lower Fees and Requirements

    Credit unions generally have lower fees and deposit requirements compared to banks.

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    More Competitive Rates

    Credit unions often offer better interest rates on loans and savings accounts than traditional banks.

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    Borrowing Flexibility

    Credit unions may provide more personalized loan options and terms than most banks.

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    Insured Deposits

    Deposits are insured up to $250,000 by the NCUA, securing the protection of your assets.

Cons of Credit Unions

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    Membership Requirements

    Credit unions often have specific membership requirements based on factors like location, employment or affiliation with certain groups.

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    Fewer Locations

    Credit unions typically have fewer branches and ATMs than traditional banks, which can be inconvenient for some members.

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    Limited Services

    Some credit unions may not offer the full range of financial products and services that larger banks do, such as a full range of loan types or investment services.

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    Customer Service

    Many credit unions are known for excellent customer service, but smaller ones may have limited hours or slower response times due to fewer staff members.

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    Resources

    Credit unions typically don’t have the same resources to invest in tech compared to large banks, though many have made progress in adopting new banking technologies.

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BANK OR CREDIT UNION?

Deciding to go with a bank or credit union will depend on what factors matter to you. If you tend to travel often and value the convenience of local branches and ATMs, a national bank with a wide-reaching ATM network might be the right fit for you.

However, a regional or neighborhood credit union could offer the most benefits if your priorities are lower fees and getting the best interest rates.

How to Choose the Best Credit Union for You

When looking for a credit union to join, consider these tips to find the best fit for your financial needs. Unlike banks — which accept virtually all types of customers — not everyone can join a credit union.

Remember that users need to apply and then be accepted to join. Some credit unions are only for military members and their family members, for instance, so if you or a loved one didn’t serve, you cannot join.

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    Determine Membership Requirements

    Each credit union has specific membership criteria based on factors like employment, geographic location or group affiliation. Make sure you meet these requirements before applying.

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    Check for Nearby Locations

    Check to see if the credit union has branches or ATMs near your home or workplace. This can save you time and make accessing services easier.

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    Review Available Products and Services

    Different credit unions offer various financial products and services. Research to see if their offerings provide the accounts, loans and products you need.

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    Compare Interest Rates and Fees

    Interest rates and fees can vary significantly between credit unions. Compare these costs to find the most competitive rates and lowest fees to maximize your savings and minimize expenses.

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    Consider Available Online Tools and Resources

    Evaluate the credit union's online and mobile banking options. Convenient and easy to use digital tools can enhance your banking experience and save time.

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    Verify NCUA Coverage

    Ensure the credit union is insured by NCUA. This coverage protects your deposits up to $250,000.

How to Join a Credit Union

Once you find a credit union — whether it’s a federal or state credit union or one through your college, community or the military — look closely into membership requirements. Most credit unions offer membership information on their websites, which should help explain eligibility requirements and details on joining.

1
Research Your Options

Start by researching various credit unions to understand what each one offers. Look for reviews to gauge member satisfaction and service quality.

2
Find Out the Eligibility Requirements

Check the eligibility criteria for each credit union you're interested in and make sure you meet its specific requirements to become a member.

3
Gather the Necessary Documentation

Prepare the required documents, such as identification, proof of address and any other information the credit union may need to process your application.

4
Apply for a Membership

You can submit your application through the credit union's website, by mail or in person. The process typically involves filling out a form and providing the necessary documentation.

5
Make an Initial Deposit

Most credit unions require a small initial deposit to open an account. This deposit often becomes your first share in the credit union and confirms your membership.

Ask the experts:

How do people find a good credit union for their needs?

Associate Professor & Director of the Financial Planning Program at Missouri State University

Credit unions can vary widely in the types of deposits, loans, and other financial products and services they offer. For example, many credit unions do not offer 30-year home mortgage loans. A consumer should check on the products and services offered. Consumers who work for large employers should see if their employer sponsors a credit union. Employers who sponsor credit unions treat them as an employee benefit.

Founder & CEO of David Aylor Law Offices

Consider which financial services you need, and shop around to find the best rates. In the market for a car loan or line of credit? Choose the credit union with the lowest interest rate. Before choosing one over the other, look into their ease of service and ATM system, which tends to be less convenient than larger institutions offer.

Co-Founder & Technical Lead at Fig Loans

The best way to find a great credit union is to ask your trusted friends and colleagues to share their experiences and insights. Most credit unions are linked to charitable causes, so you may choose one that requires a donation to a charity that’s meaningful to you.

FAQ About How Credit Unions Work

MoneyGeek compiled answers to frequently asked questions about how credit unions work so you can make informed financial decisions.

What is the major difference between retail banks and credit unions?
How many credit unions are there in the US?
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Resources to Help You Find Credit Unions

Many resources are available to help you gain a deeper understanding of credit unions. Below are a few places to consult.

  • College Finance: This website will give you a rundown of the best banks and credit unions for college students and includes pertinent information like fees and account access details.
  • Credit Union Times: Credit Union Times offers whitepapers, case studies and industry analyses from industry leaders on topics ranging from digital engagement to valuable credit union loans.
  • The Military Wallet: The Military Wallet compares different military banks and credit unions to highlight the offers and determine the best options.
  • Alliant Credit Union: Alliant allows you to compare rates to other credit unions and banks for both fixed or adjustable rate mortgages.
  • Credit Union Locator: Use the MyCreditUnion.gov tool to find a credit union in your area and determine which ones offer member services, drive-thrus and ATMs, among other services.
  • Credit Union National Association: CUNA is the only national association that advocates for the entire credit union movement. You can find events, training, products, news and more.
  • National Credit Union Administration: The NACU can help find a specific credit card union and learn more about rules, regulations and resources about credit unions and best practices.

About Alvin Yam, CFP


Alvin Yam, CFP headshot

Alvin Yam is a certified financial planner (CFP) with over 15 years of experience working with individuals and corporations. Before founding Paraiba Wealth Management, he was a director at HSBC and a financial consultant at Charles Schwab. Yam is MoneyGeek's expert consultant on wealth management and personal banking.

Yam earned his bachelor's degree in political science from the University of California, San Diego, and his Master of Business Administration from Loyola Marymount University.


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The content on this page is accurate as of the posting/last updated date; however, some of the rates mentioned may have changed. We recommend visiting the lender's website for the most up-to-date information available.

Editorial Disclosure: Opinions, reviews, analyses and recommendations are the author’s alone and have not been reviewed, endorsed or approved by any bank, lender or other entity. Learn more about our editorial policies and expert editorial team.