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credit unions and money

Money Management Center

A Guide to Credit Unions

Mike Deane Nov 05, 2014


During the 2008-2009 financial crisis, many people lost their faith in banks because of rampant bankruptcies, questionable investments and even more questionable loans. There is that perception that some banks are just trying to make maximum profits and are not concerned about their customers’ savings and well-being. Aside from these broader complaints about banks, many customers are fed up with the introduction of new fees, and the fact that most banks have a global focus, rather than a focus on the community in which their customers live.


If the above complaints sum up your mindset when it comes to banks, there is an alternative out there – and it’s not stashing your cash in your mattress. Credit unions are member-owned, not-for-profit organizations that have a stated goal of providing services for their membership; this is different than banks, which are in business to turn a profit and must answer to stockholders. Read on to learn about the pros and cons of credit unions and the difference between credit unions and banks.


What Is a Credit Union?


Many consumers that are fed up with banks find themselves asking what a federal credit union is.

Credit unions are financial co-operatives that are democratically run by their members. This means that if you have money invested in a credit union, you get a say in how that money is used. Credit unions are created by members who share a common characteristic, such as location, the field in which they work, or even the institution that they all work for. Many credit unions have a community focus, with loans being made to help projects in the place that the members live. Since credit unions are also not-for-profit, there is not the impetus to make risky investments to create more cash; instead, the focus is on driving down fees for the credit union members, and giving fair loan terms and fair service.

According to a study called “Service quality at banks and credit unions: what do their customers say?” done by two business professors in 2000, credit union members are more satisfied with their financial services than those who use banks. This is probably because of credit unions’ focus on its members, and providing the service that the members have decided on.

To be a member, you must have money invested in the credit union, and no matter how much money you have in, this guarantees that you get a vote in deciding how the credit union does business. Credit unions vary in their size, ranging from very small volunteer-run organizations to large, billion-dollar, statewide institutions. To find credit unions in your region, click here.


How Do Credit Unions Work?


Credit unions are run democratically, which means that every member—regardless of how much money they have with the credit union–gets one vote when deciding how the credit union will use its funds. All members invest some amount of money in the credit union, and with this pool of money, all members get a say in how it is invested or loaned out, and the interest rate and terms of the loan. With a credit union, you are able to access many of the financial instruments that you can at a regular bank; savings accounts, checking accounts, certificates of deposit and money market accounts are available depending on what credit union you belong to. As well, you can obtain loans and mortgages from credit unions. When you’re looking to save or borrow, you should know how compounding interest works; check out The Pros And Cons Of Compound Interest.

Below are the 10 largest credit unions by number of branches as of 2012.


Credit unions come in all sizes, but regardless of the size, it is likely that there is a credit union nearby no matter where you live. Below we highlight the pros and cons of credit unions.


Pros


The positive side of a credit union is fairly obvious: you get to help decide how your money is used, and if there’s something you object to, you are able to vote against it. As well, you help decide the terms of how money is loaned out, so your involvement in the organization goes beyond your personal banking, and you will feel like you are adding to the well-being of your community. Because credit unions are not focused on profit, you will also see less fees than you do with normal banking, and interest rates will be lower when you want to take out a loan.

If this sounds like something you’re interested in, you definitely want to check out the National Credit Union Administration website for more information about what other benefits you will get from joining a credit union, as well as tons of resources. You do want to be sure the credit union you are choosing has the NCUA seal, which tells you the money you have in a federally insured credit union up to $250,000 is protected, same as FDIC protects money in a bank account. And just like FDIC, NCUA insurance is backed by the full faith and credit of the U.S. government. Top personal finance guru Suze Orman is now a spokesperson for NCUA as well.


Cons


The biggest downside of a credit union is that they are not national or international entities, so you don’t have the same access to ATMs that you would with the bigger banks that have ATMs on corners throughout every city and town in the U.S. This is probably the only place where you will see higher fees, because you will have to pay other banks’ fees when withdrawing from one of their ATMs. If you’re staying with a bank, find out how to make it more affordable; read 7 Sure-Fire Money-Saving Banking Moves.


Credit Union vs. Bank


So what is the difference between credit unions and banks? Before considering a switch from a credit union to bank (or vice versa), it is important to understand the differences. Below is a summary of the differences.

  • Credit unions are non-profit organizations,while banks are for-profit.
  • Credit unions are insured by the NCUA, while banks are insured by the FDIC (both for $250,000).
  • Credit unions often charge lower fees and interest rates than banks.
  • Credit unions are not national – so they do not have ATMs. Therefore, members will be charged higher ATMs fees than those who use banks.
  • Members of credit unions are able to vote on decisions made for projects.


The Bottom Line


Credit unions are gaining more and more members, and if you look at the advantages of joining a credit union, it’s not very hard to figure out why. If you’re interested in joining one, do the research to see which one in your area is best for you, and find out the eligibility requirements to become a member. To find one near you, check out the American Credit Union Database.

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