What Is A Credit Union And How Does It Differ From A Bank?
What is a credit union and how does it work? A credit union has the same functions as a traditional bank, with the difference that its corporate purpose is to meet the financial needs of its members and third parties.
Let's see its concept and functions, how they differ from traditional banks, as well as the types of cooperatives we can find.
How does a credit union work?
A credit union operates by using their members' saved money to provide loans to their members, who are also their clients.
The credit union reinvest the earnings to improve the benefits or services provided to its community members. These earnings are also used to pay the expenses and its members are the managers and owners of the financial cooperative.
How does a credit union differ from a bank?
The most important difference relates to the ownership of each of these institutions and what this entails.
The owners of the bank are its shareholders (since they are corporations). Therefore, decisions are made by management and voting rights are proportional to the number of shares owned.
In credit unions, on the other hand, the owners are their members or partners, and in this case, each person is equivalent to one vote, regardless of the number of shares or capital owned in the credit union.
As members, they have the right to participate in the results obtained by the cooperative at the end of each year.
Finally, bank shareholders usually have certain difficulties in obtaining credit from their own bank, while in the case of credit unions, it is sufficient to become a member and meet the requirements of their status to obtain credit under the conditions offered by the institution.
Credit unions characteristics
- They are freely associated among the associates.
- They are not-for-profit organizations.
- Both entry and exit shall be voluntary.
- Its structure and operation shall be democratic.
- Its activities are aimed at satisfying the economic interests of its members.
What are the different types of credit unions?
There are 2 main types of credit unions:
1. State-chartered credit union
State-established credit unions are governed by their respective state's financial services division regulatory authority.
2. Federal-chartered credit union
Federally chartered credit unions include the word "federal" in their name and are under the regulatory authority of the National Credit Union Administration, or NCUA.
Membership requirements for credit unions
Commonly, the eligibility to join a financial cooperative in US will vary based on the credit union itself.
However these are the most common requirements to be eligible to become a member:
- Being at least 18 years old.
- Living, working, attend to school or worshipping in the geographical area where the credit union operates.
- Being an immediate parent of someone who is already a member of the financial cooperative.
- Being an employee or retiree of a Select Employee Group (SEG).
- Social Security Number (SSN).
- A government-issued ID.
- Home address.
- Employment information.
Advantages of credit unions
There are several benefits of credit unions that you won't necessarily get on traditional banks such as:
1. Lower loan rates
Whether you need a vehicle loan, home equity loan, mortgage loan or any personal loan, you'll have the piece of mind on getting the lowest APRs compared to traditional banks.
2. Lower fees
Another advantage of using a credit union is the low fees. At the largest banks they tend to charge a fee for everything.
There are overdraft fees, ATM fees, service fees and more. At a credit union, overdraft, checks or electronic transactions fees are lower and there are no ATM fees.
There are usually no minimum balance requirements and most accounts are free.
3. Better interest rates
Credit unions tend to offer better interest rates for savings accounts and CDs.
4. Members focused
Since financial cooperatives are non-profit organizations, they reinvest their earnings to enhance the services offered to their members.
5. Wide range of financial services
Financial cooperatives offer a wide range of financial services, from savings accounts to mortgages, personal loans, small business loans and auto loans or refinancing with better interest rates.
6. Flexibility
Smaller credit unions can provide greater flexibility for people with financial problems.
7. Your money is safe
They are insured up to 250,000 by the federal government, so if the credit union in which your money is held goes bankrupt, you will be insured up to that amount in the event you have that balance in your account.
Disadvantages of credit unions
Even when this type of financial institution is more friendly to people, it has some drawbacks that we'll be pointing next:
1. Less choice for financial products
While traditional banks offer several options for savings account and credit cards, financial cooperatives tend to offer only around 3 options for savings accounts and fewer options for credit cards.
2. Limited branch locations
Unlike traditional banks that use to have branches spread out the country, the credit unions commonly have a limited amount of physical locations, which are focused on their community area.
Although this is not necessarily the case for ATMs.
3. Elegibility restrictions
Memberships are open only to those who meet the elegibility requirements, which are commonly based on a specific geographical location.
Conclusion
While credit unions are smaller than traditional banks, they can provide you with personalized banks services, even when you have financial issues, as long as you meet the elegibility requirements, which are commonly based on geographical locations.
Financial cooperatives are members-focused and not-for-profit.
Credit unions FAQs
What is the main purpose of a credit union?
Its main purpose is to address the economic, social and cultural needs and aspirations common to all members through a company.
Why use a credit union instead of a bank?
Because it provides low-cost, often free, services to its members in the form of better rates, lower fees, and, at Velocity, free checking accounts.
