Credit Unions: Definition, Membership Requirements, and Vs. Banks

What Is a Credit Union?

A credit union is a type of financial cooperative that provides traditional banking services. Ranging in size from small, volunteer-only operations to large entities with thousands of participants spanning the country, credit unions can be formed by large corporations, organizations, and other entities for their employees and members.

Credit unions are created, owned, and operated by their participants. As such, they are not-for-profit enterprises that enjoy tax-exempt status.

Key Takeaways

  • Credit unions are financial cooperatives that provide traditional banking services to their members.
  • Credit unions have fewer options than traditional banks, but offer clients access to better rates and more ATM locations because they are not publicly traded and only need to make enough money to continue daily operations.
  • However, credit unions have considerably fewer brick-and-mortar locations than most banks, which can be a drawback for clients who like in-person service.
  • Credit unions are exempt from paying corporate income tax on their earnings.

Understanding a Credit Union

Credit unions follow a basic business model: Members pool their money—technically, they are buying shares in the cooperative—in order to be able to provide loans, demand deposit accounts, and other financial products and services to each other. Any income generated is used to fund projects and services that will benefit the community and the interests of its members.

Requirements for Membership

Originally, membership in a credit union was limited to people who shared a "common bond": working in the same industry or for the same company, or living in the same community. In the recent past, credit unions have loosened the restrictions on membership, allowing the general public to join.

To do any business with a credit union, you must join it by opening an account there (often for a nominal amount). As soon as you do, you become a member and partial owner. That means you participate in the union's affairs; you have a vote in determining the board of directors and decisions surrounding the union. A member’s voting ability is not based on how much money is in their account; each member gets an equal vote.

Totally assets in federally insured credit unions as of June 30, 2020, were $1.75 trillion.

According to the National Credit Union Administration (NCUA), membership in federally insured credit unions grew to 122.3 million as of June 30, 2020.

Advantages of Credit Unions

Like banks, the process of making money at credit unions starts by attracting deposits. In this area, credit unions have two distinct advantages over banks, both resulting from their status as nonprofit organizations:

  1. Credit unions are exempt from paying corporate income tax on earnings.
  2. Credit unions need to generate only enough earnings to fund daily operations. As a result, they enjoy narrower operating margins than banks, which are expected by shareholders to increase earnings every quarter.

Being able to work with narrow margins allows credit unions to pay higher interest rates on deposits, while also charging lower fees for other services, such as checking accounts and ATM withdrawals. In short, a credit union can save members money on loans, accounts, and savings products.

According to National Credit Union Administration (NCUA) data as of Sept. 25, 2020, the national average rate for five-year certificates of deposit (CDs) offered by credit unions was 0.94%, compared to an average rate of 0.78% at banks.

Credit unions provide better rates on most mortgages, including 15-year and 30-year fixed mortgages, which could be a good option if you are looking to purchase a home.

Money market rates at credit unions were also higher, with an average rate of 0.17% versus the average bank rate of 0.12%. While these differences sound small, they do add up, giving credit unions a significant advantage over banks when competing for deposits.

Disadvantages of Credit Unions

Credit unions have considerably fewer brick-and-mortar locations than most banks, which can be a drawback for clients who like in-person service. Most offer modern services such as online banking and auto-bill pay. Still, the small size of many credit unions can mean a compromise in a breadth of services, technology, and accessibility.

Lower Tech

Smaller credit unions typically do not have the same technology budget as banks, so their website and security features are often considerably less advanced. That said, some mid-sized and larger credit unions may offer mobile banking apps that rival those of much bigger for-profit institutions.

Fewer Options

While credit unions offer most of the financial products and services that banks do, credit unions often provide less choice. Bank of America has 22 different credit card options as of Nov. 12, 2020, ranging from rewards cards to student cards, while the Navy Federal Credit Union (NFCU) has only six as of Nov. 12, 2020. The second-largest credit union in the country, the State Employees’ Credit Union (SECU), offers one credit card.

Less Flexibility

With more resources to allocate to customer service and personnel, banks are keeping later and longer hours: open until 5 p.m. or 6 p.m. on weekdays and often on Saturdays, as well. Credit unions tend to maintain traditional bankers' business hours (9 a.m. to 3 p.m., Monday through Friday), though the larger ones, such as SECU, have a 24-hour customer service hotline.

Credit Unions vs. Banks

Credit unions are significantly smaller in size than most banks and are structured to serve a particular region, industry, or group. However, just because most credit unions have fewer branches does not mean they cannot have a reach similar to that of big banks. Many credit unions are part of an ATM network designed to expand their reach.

While credit unions still must make enough to cover their operations, the absence of the need to generate profits generally allows for lower fees and account minimums, higher rates on savings, and lower borrowing rates for their members and owners.

Insurance on Credit Union Accounts

The Federal Deposit Insurance Corporation (FDIC) does not cover credit unions. However, the NCUA, established in 1934, regulates federally chartered credit unions and most state-chartered credit unions. The Credit Union Locator can verify whether a credit union is federally chartered and other information.

One of the NCUA's main responsibilities is to administer the National Credit Union Share Insurance Fund (NCUSIF), which uses federal monies to back up shares (deposits) in all federal credit unions.

The NCUA provides coverage for each individual account, joint account, trust account, retirement account (such as traditional IRAs, Roth IRAs, or Keogh plan accounts), and business account for up to $250,000 per account. For example, if you have an individual account, a Roth IRA, and a business account at a credit union, your total shares are insured up to $750,000.

Article Sources
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  1. National Credit Union Administration. "Quarterly Credit Union Data Summary 2020 Q2." Accessed Nov. 12, 2020.

  2. National Credit Union Administration. "Comparison of Average Savings, Deposits and Loan Rates at Credit Unions and Banks." Accessed Nov. 12, 2020.

  3. Bank of America. "Credit Cards." Accessed Nov. 12, 2020.

  4. Navy Federal Credit Union. "Credit Cards." Accessed Nov. 12, 2020.

  5. State Employees' Credit Union. "Visa Credit Card." Accessed Nov. 12, 2020.

  6. MX. "Biggest US Credit Unions by Asset Size (2020)." Accessed Nov. 12, 2020.

  7. National Credit Union Administration. "How Your Accounts Are Federally Insured." Accessed Nov. 12, 2020.