Credit Unions: How Do They Work?
I’m sure you’ve seen several Credit Union offices and ATM’s around your city and wondered what exactly they are. They seem to function similarly to banks, so is that what they are? Well, not quite.
What is a Credit Union?
Credit Unions are non-profit institutions that are owned by account holders, better known as members. All profit earned by a credit union is invested back into the organization or paid out to members as a dividend. Since no profit is retained, a credit union is not required to pay any state or federal taxes. Making this the key difference between credit unions and banks. Due to this, credit unions will often offer lower interest rates compared to a traditional bank.
How are Credit Unions Formed?
Credit unions are designed to be cooperative financial institutions where all the members have something in common. They may have the same profession, work for the same company, graduated the same college, attend the same church or any other similarities. Specific requirements for joining a credit union can vary based on the union.
How Do Financial Functions Work Under Credit Unions?
Once you deposit money into a credit union account, you’re now an owner-member to that organization. The credit union uses the money you deposited to lend out loans to other members. So essentially, every deposit is part of a larger pool of money that assists all the members of the union. Unlike a bank, the customers of a credit union are also its owners, making it more consumer-friendly.
Advantages of Credit Unions
- Lower Banking Fees:- Since Credit Unions are non-profit, fees for financial transactions are often much lower compared to a traditional bank.
- Lower Interest Rates:- Similar to the previous point, since credit unions are not focused on making a profit, they’ll have a more attractive interest and savings rate. This will allow you to save a significant amount on personal loans, student loans, and mortgages.
- Easier Eligibility:- Once you’re a credit union member, that organization is focused on assisting your financial needs. That means if you have a low credit score, it can still be possible to make arrangements and work around that. Some credit unions even offer educational programs to help you manage your budget and expenses so you can improve your score.
- Better Customer Service:-Since credit unions are organizations for the members by the members, it’s no surprise that they prioritize quality customer service. You can receive individualized attention far more easily than at a bank, guaranteeing that you’re assisted in the best way possible.
Disadvantages of Credit Unions
Exclusive Membership:- Since credit unions are member-centric, it’s imperative that you meet the requirements to become a member. That can range from things like working at a specific company to living in a certain city. Luckily, there’s a myriad of credit unions so it isn’t extremely difficult to find one you’d be eligible for.
Limited Branch Locations and ATMs:- Since credit unions generally serve a specific community, their branches and ATMs are less prevalent outside of that serving location. This can prove to be an inconvenience when you aren’t in your hometown.
Fewer Services:- Credit unions are constantly working towards functioning more like banks but they still have a ways to go. The loan amount you can take out might have lower limits compared to a traditional bank, making it more ideal for smaller and simpler financial transactions.
Not as Tech-Savvy:- Most credit unions still function through in-person interactions and are less likely to have fully equipped apps and online services. This can be an inconvenience if you’re someone who prefers to get all their financial work done at the comfort of your own home or office.
Although credit unions are essentially non-profit banks, they do possess several differences and advantages worth looking into. If you can find one that you’re eligible for and meets your needs, we strongly recommend applying to be a member. It is a convenient and helpful financial institution that can assist you in areas that a traditional bank might fall short.