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What Is a Credit Union? Compare It to Banks

By June 16, 2022June 24th, 2022No Comments
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What is the difference between a credit union and a bank?

A credit union is a cooperative, nonprofit financial company governed by state or federal law and owned by its members. Credit unions, which are democratically controlled and organized to serve their members, offer a secure location to save and borrow at competitive rates. 

Each credit union’s administration is delegated to a volunteer board of directors. Each credit union member gets one vote in the election of directors and other governance concerns. “Not for Profit, Not for Charity, But for Service” is the credit union’s slogan.

Credit unions are non-profit financial institutions that serve the needs of their members, who are regarded as co-owners. While credit unions provide many of the same services as banks, they are considerably more customer-centric, which may benefit clients wishing to establish credit or access more flexible lending policies.

What Are Credit Unions and How Do They Work?

On the surface, credit unions operate similarly to banks, providing consumers with a secure location to deposit cash and a complete range of financial services, such as checking and savings accounts and loans. On the other hand, credit unions tend to take a greater personal interest in their members’ financial well-being. Account members contribute money to the credit union, which is used to finance the organization.

Joining a credit union allows you to become a part-owner of a financial entity that cherishes its members’ opinions.

What Do Credit Unions and Banks Have in Common?

Customers may get much of the same financial goods and services from credit unions and banks. On the other hand, a credit union might provide a completely different banking experience than a regular bank. Consider the following fundamental contrasts between banks and credit unions:

1. Structure of the Organization

A credit union is a non-profit, tax-exempt organization that intends to return earnings to its members. These gains might be in the form of lower borrowing rates or incentives such as free bank accounts. Members voted for a volunteer board of directors to oversee the credit union’s operations. A typical bank is run by a group of shareholders and investors who want to make a profit; consequently, they may be more focused on charging higher rates.

2. Operational Scale

The majority of banks have a national or regional presence. When traveling, you may take advantage of the ease of visiting one of a big bank’s numerous branches and utilizing an ATM. Credit unions operate on a smaller scale and are generally located in a particular location. Credit unions compensate by allowing members to deposit checks and access cash via a nationwide network of cooperative credit unions.

3. Interest Rates

Banks are more likely to charge higher interest rates on loans and credit cards and higher fees for conventional financial goods like checking accounts since they are more focused on increasing profits for shareholders. On the other hand, a credit union often offers lower interest rates and fewer loan fees.

4. Requirements for Membership

In most cases, showing up with evidence of identity is enough to qualify for a bank account. You may have to fulfill specific qualifying criteria depending on the credit union. Certain credit unions only admit people who have a shared relationship with the organization, such as those who work for a specific business or organization, are related to an existing member or are members of particular clubs or professional associations. Many credit unions have eased their qualifying rules in recent years, making it relatively simple to locate one that would accept you as a member.

What Are the Different Credit Union Types?

While most credit unions provide comparable financial services, others specialize in serving specific groups or associations, such as military families, police officers, teachers, and government workers. Credit unions may be found locally, regionally, or nationally, and they fall into one of two categories:

  • Credit unions that the federal government charters
  • Credit unions with a state charter

Credit Unions with a Federal Charter

National Credit Union Share Insurance, which provides up to $250,000 in insurance protection per account to federally chartered credit unions, protects its members’ cash. Look for the official National Credit Union Association insurance symbol on its website or branch location, or the phrase “federal” in the name, to see whether the US government backs a credit union.

Credit Unions Chartered by the State

Deposits are protected by private insurance in state-chartered credit unions. Your money will be safe, but remember that the insurance is not guaranteed by the United States government and may not be as trustworthy.

The Benefits of Credit Unions

Joining a credit union allows you to be a part of a financial institution that values its members’ financial health and well-being. Here are a few of the most significant benefits of credit unions.

  • Improved Rates

If you join a credit union, you’ll get cheaper loan interest rates and more excellent interest rates on savings accounts. This is particularly true if your financial past has been more challenging or confusing. More money in your pocket, in other words.

  • Fees are reduced.

Credit unions provide various benefits, including lower fees and borrowing rates. Because credit unions aren’t interested in making a profit, the savings are passed on to you in the shape of reduced interest rates.

  • Service to Customers

Credit unions may provide excellent customer service since they are smaller companies that rely on the engagement of their members to flourish. If you visit your local branch, you’re more likely to form connections with credit union personnel. Credit unions also provide additional services to help members reach their financial objectives, such as budgeting tools and other advice.

  • Participation in the Community

A shared interest in the community is a credit union’s core. Credit unions are formed to assist the community in which they are located. Many credit unions help the community through organizing philanthropic events, financial literacy initiatives, and partnering with other local groups.

  • Participation Capacity

You obtain the ability to vote for the board of directors that governs your organization as a member. This democratic foundation also applies to other advantages. Credit unions, for example, may ask members for comments on future upgrades or adjustments.

  • Credit Union Disadvantages

On the other hand, credit unions may not be the best option if you’re looking for distinct goals in your financial institutions. The following are the significant drawbacks of credit unions:

  • Locations

Your credit union is unlikely to be found in another city or municipality. Credit unions tend to specialize in a particular geographic area, which might be troublesome if you need to access your cash while traveling.

  • Technology

In terms of tech-friendly features, credit unions fall behind regular banks. Banks often invest revenues in the most recent technology advancements, such as mobile apps and websites that strive to provide a seamless, user-friendly experience. Mobile deposits, for example, may not be available at your local credit union.

  • Concerns about membership

A minimal upfront charge — generally between $5 and $25 — is required to become a member. On the other hand, certain credit unions demand you to be a member of a particular organization or work for a specific firm. If you can’t locate a credit union in your location that has more lax membership qualifications, this may restrict your possibilities.

  • Options and Services

The financial goods and services offered are not as broad as those provided by a regular bank. Although credit unions have made significant progress, and many now match the offerings of large banks, the goods and services available vary for each credit union. As a result, you may not be able to meet all of your demands, such as obtaining a business mortgage loan. Before joining, do your homework on what your local credit union offers, just like you would with a commercial bank.

Why isn’t the cash I usually deposit accessible to me right away?

The duration that federally insured financial institutions may keep check deposits before making the cash accessible to the depositor is governed by Federal Regulation CC (Availability of Funds and Collection of Checks). This rule aims to strike a compromise between the credit union’s risk of loss from fraud and the member’s requirement for access to their assets. The hold may range from one day until the day the institution receives the monies, depending on the kind of check, the amount of the bill, and whether it is categorized as local or non-local. Credit unions must explain their fund’s availability policy at all sites where deposits are taken.

Is my purchase of mutual funds or annuities insured?

The federal government does not cover mutual fund shares and annuities bought through a credit union. The mutual funds are subject to the same risks as other mutual fund shares, including the chance of losing money. Insurance companies often provide annuities, and their safety is dependent on the insurance firm that underwrites them. Your credit union should be able to supply you with financial information on the insurance business.

Is it legal for a credit union to take money from a personal account without permission?

Yes. If you have a personal account and a loan with the same credit union and are behind on your payments, the credit union has the power to enter your account without notice and take the amounts needed to bring the loan current. This is usually handled in the loan agreement and membership agreement when you give the credit union a security interest in your accounts. The credit union also has the authority to apply for monies in your account to any statutory lien or right of set-off debt you owe the credit union. Mutual obligations are adjusted against one other under the idea of “set off.” For example, if you have money in a credit union deposit account, the credit union “owes” you that money. Set off allows the credit union to collect its debt “from” you by canceling its obligation “to” you when you owe the credit union money. To put it another way, one balances out the other.

Can a credit union retain my car title after I repay my loan?

Cross–collateralization is a condition in most credit union loan papers that allows the credit union to keep the collateral provided for one loan until all of the credit union’s loans are paid in full. If you default on any credit union loans, this provision authorizes the credit union to seize the collateral (in this example, the automobile). In each scenario, the conditions of your loan agreement(s) would precede.

What are my options if an automated teller machine (ATM) transaction is made without my permission?

The scope of a member’s responsibility for unlawful ATM transactions may be restricted to the first $50 withdrawn under Federal Regulation E (Electronic Funds Transfer Act). Liability may be increased depending on the circumstances, such as how long the member waits to notify a lost ATM card or fraudulent transactions. If, on the other hand, the transactions are carried out by someone to whom the member has given the card and personal identification number, the trades are typically believed to have been approved.

When illicit transactions are found, the member is responsible for promptly reporting to the credit union, which triggers an investigation by the credit union.

What should I do if I have a dispute with a credit union?

If you have an issue, you should first attempt to address it on your own by calling a credit union official. A complaint is often the consequence of a simple misunderstanding or misinterpretation that may be quickly remedied. Credit unions care about their members and will, in most cases, respond to your complaints. You may contact the Credit Union Department if you cannot address your concern with the institution directly. More information about the kind of complaint and how we may assist can be found in this website’s “Complaints” section.

Taylor Day