What Makes Credit Unions Unique? How They Differ From Traditional Banks
Your financial well-being starts with making an informed decision about your banking choices. There are plenty of traditional banks vying for your business as well as cutting-edge fintechs entering the market, but the former can be out of touch with your needs, and the latter is a minefield of unregulated risk. What makes credit unions unique is their approach to making your banking experience better.
Whether you're looking for essential savings and checking accounts, a mortgage or auto loan, or a competitive rate on a credit card, a credit union could very well be your best choice. Find a local credit union near you and discover the credit union difference.
What Makes Credit Unions Unique?
Credit unions are focused on the needs of the community and deliver a personalized experience. If you've ever felt like a faceless, nameless account number when dealing with a big bank, you'll love how a credit union treats you — and your money.
Here's everything you need to know about the credit union difference and why you should join one.
History of Credit Unions in the U.S.
Credit unions have existed in the United States since the early 1900s, driven by a need for community banking. The first formally recognized credit union in the U.S. was St. Mary's Cooperative Credit Association, which opened in Manchester, New Hampshire in 1909. More quickly followed.
Since their inception, credit unions have focused on providing banking services to underserved communities. In the 1920s, for example, credit unions were often the only financial institutions serving historically black communities and groups of farmers. By the 1930s, more than 2,000 credit unions were operating across the United States, most holding a state charter.
In 1934, President Franklin Delano Roosevelt signed the Federal Credit Union Act into law. The newly created Federal Credit Union Division was placed under the Farm Credit Administration.
That same year, the Morris Sheppard Federal Credit Union became the first federally chartered credit union in Texarkana, Texas. Today, nearly 5,000 federally- and/or state-chartered credit unions exist in the U.S.
Member Ownership and Governance
When you join a credit union, you're a member, not a customer. Instead of simply using services, you're actually a part owner of the credit union and have a say in how it's run.
Credit unions are both owned and governed by their members. When you become a member, you gain the right to participate in the organization through direct voting. Every credit union member has equal ownership and a single vote regardless of how much money they have on deposit. Credit unions are true economic democracies.
Earnings are returned to member-owners in the form of patronage (lower loan rates and credit card rates, higher interest on deposits, and lower fees) and dividends on the common share purchased at the time of membership opening or invested at a later date.
All members participate in the election of the board of directors. Board members are responsible for setting organizational policies, approving credit union budgets, and directing strategic planning.
Credit union member ownership benefits include:
- More control over how your financial institution operates
- Lower loan rates and credit card rates
- Lower fees across the board than traditional banks
- Higher interest rates on deposits
- Profit sharing for all members (usually distributed quarterly or annually)
- Protected deposits through the National Credit Union Administration
The moment you join a credit union, your member-owner benefits kick in. You'll be able to use your funds better while having a say in how your financial institution runs.
Not-for-Profit Status and Social Responsibility
A not-for-profit organization qualifies for tax-exempt status from the IRS. They are designed to provide a public benefit and further a social cause, and any profit must be shared among its members.
Common not-for-profits include charities, foundations, universities, and hospitals, but credit unions also make the list. As socially responsible organizations, credit unions often open branches in underserved communities, making it easy for unbanked individuals to join and enjoy better financial security.
Credit unions' not-for-profit status and social responsibility allow them to provide better, more personalized care to the communities and individuals they serve.
Cooperative Business Model
Credit unions are considered cooperative financial institutions. Cooperatives are businesses owned and run by their “member-owners,” who all get a voice in how the business is run. Services or goods provided by a cooperative are designed to benefit and serve member-owners, not to provide profit for external shareholders.
Benefits of the cooperative business model include:
- A democratic process that gives member-owners control
- A share in the profits of the organization
- A focus on benefiting the local community
A common bond of identity or association typically defines credit union membership. You may be able to join your local credit union based on:
- Your employer. Many companies sponsor their own credit unions, and you can easily become a member.
- Your family. You can likely join if someone in your family is a credit union member.
- Your geographic location. Credit unions often allow anyone living, working, going to school, or worshiping in a specific geographic area to become a member.
- Your existing group membership(s). You may qualify to join an associated credit union if you already belong to a specific group, such as a school, place of worship, homeowners association (HOA), or labor union.
Focus on Member Service and Financial Education
A big part of what makes credit unions unique is their focus on member service and financial education. Credit unions avoid high-risk lending and strive to help their members avoid financial risk.
Typical member service offerings by credit unions include:
- Savings accounts (basic, high-yield, and money-market accounts)
- Checking accounts (personal checking and business checking)
- Online banking and/or mobile banking
- Loans (personal loans, auto loans, and home mortgage loans)
- Lines of credit (credit cards, home equity lines of credit, etc.)
- Telebanking, automatic bill payments, and remote check deposit
Most credit unions offer access to educational services and financial advisors. Credit unions aim to educate and inform member-owners about their financial options and help them make good choices. They also likely offer various investment options to help your money earn more money.
Additionally, your credit union might offer special online or mobile tools to help you budget or automatic transfers to make it easier to transfer money into your savings from each paycheck.
Lower Fees and Interest Rates
One of the biggest attractions of credit unions is their fees and interest rates, which are typically better than those traditional banks offer.
As a not-for-profit cooperative organization, all profits go back to members. Some of the profits go into your savings account as dividends, and the rest go toward lowering your credit/loan interest rates and banking fees and paying more interest on account deposits.
For example, in Q4 2022, the average interest rate charged on credit cards issued by credit unions stood at 11.32%, compared to 12.35% at most banks. Five-year certificate of deposit (CD) accounts paid an average national interest rate of 1%, compared to 0.74% for banks.
Additionally, banking fees are lower at credit unions vs. banks. In 2022, the average non-sufficient funds (NSF) fee was $28.36 at credit unions compared to $31.54 at banks, and the average credit card late was $24.56 at credit unions compared to $34.18 at banks.
Further Resources on Credit Union Member Ownership Benefits
The credit union difference means you can do more with your money while enjoying a high level of personalized service.
- Know your deposits are safe. Federally insured credit unions offer $250,000 in deposit protection through the National Credit Union Administration (NCUA) instead of the Federal Deposit Insurance Corporation (FDIC) that services traditional banks.
- Have your voice heard. Most credit unions issue an annual call for nominations for their board of directors. You can get nominated, run, and potentially gain both a board seat and a say in your credit union’s strategy.
- Support your community. Banks keep closing branches in underserved and rural areas. Your local credit union could be critical to your community’s growth and development.
Become a Credit Union Member Today
Taking advantage of credit union member ownership benefits is easy. Joining a credit union usually only costs between $5 and $25, and you’ll be on your way to enjoying low interest rates and fees, personalized service, and high earnings on your deposits. Find a credit union near you!