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Credit Unions

As traditional financial institutions create complex banking rules while raising rates for everyday services, more people are looking toward a different kind of banking experience. Credit unions aim to give them that alternative.

Credit unions are nonprofit organizations that have two goals – to provide easy-to-obtain services at a cheaper price and to spread the proceeds of the organization among its members. The members are people who participate in the credit union — its customers.

A credit union is a cooperative. It is controlled by its members, who are represented by a board of directors. As a member of a credit union, you are considered an owner, giving you the right to both vote and run for board positions. Credit unions believe in “one member, one vote” regardless of financial assets. Board members receive no compensation for service.

This differs from the basic structure of banks, which are for-profit companies or partnerships whose goal is to make money for stockholders. Credit union profits are continuously reinvested, which allows the organization to offer lower interest rates on loans. Because credit unions are not-for-profit, they are also exempt from most state and federal taxes.

While credit unions are nonprofit organizations, they remain carefully regulated. The National Credit Union Administration (NCUA) is an independent federal organization that insures members’ savings and regulates how credit unions operate. The NCUA issues annual grades to each credit union. It serves as a yearly assessment of a credit union’s fiscal health and management. The NCUA works much like the Federal Deposit Insurance Corporation (FDIC) does for banks and insures deposits up to $250,000.

There are four types of credit unions. Each is defined by its field of membership, and not everyone is eligible for every type of credit union.
  • Local credit unions: Also known as community credit unions, local credit unions exist to serve a specific resident – of a city, county or area. Typically all that is required to join is residence within a defined region.
  • Group credit unions: These typically serve churches or other small community groups. Group credit unions usually limit membership to a specific group.
  • Employer credit unions: Like group credit unions, employer credit unions serve a specific company, profession or industry. Teachers, firefighters, postal employees, media employees and workers for a specific government agency may have their own credit union.
  • Federal credit unions: These are national credit unions with only a few membership restrictions. Generally, they require a member to be at least 18 years old and a U.S. citizen.

Benefits of Credit Unions

Most credit unions offer the same services and products as banks, such as mortgages, lines of credit, auto loans, checking and savings accounts, and the convenience of electronic banking and Automated Teller Machines (ATMs). Some larger credit unions even sell stocks and offer safe deposit box rentals.

However, a credit union stands apart from traditional banks because it often can provide additional benefits to its members. Those may include lower fees, lower balance requirements, more competitive interest rates and less-stringent requirements for loans.

Here are some potential benefits of credit unions:
  • Lower banking fees:  Most credit unions offer lower fees on basic transactions, from ATM withdrawals to overdraft charges.  Many offer free checking as well.
  • Lower balance requirement: Many credit unions require an account balance of only $5 to $10.
  • More competitive credit card, loan and savings rates: A typical credit card commands an interest rate of 11.61 percent through a credit union, according to the National Association of Federal Credit Unions, while a for-profit bank would most likely charge at least 13.25 percent. Over time, such a variance makes a significant difference in payments and interest charged.
  • Less-stringent loan qualifications: If you have a good credit history, you may have a better chance of securing a personal loan at a credit union, as they are in a better position to lend. Some credit unions also may be willing to work with you if you have a low credit score or extenuating circumstances, such as being self-employed or having a bankruptcy on your record.
  • Better customer service: Credit unions often outperform banks in customer service, giving members more time at the counter and more individual attention. This is particularly important in lending, where tough, impersonal lenders and aggressive actions can lead to a lot of stress and fear on the part of the borrower.

Credit Unions & Student Loans

Dozens of credit unions across the country are part of the Credit Union Student Choice program, which offers student loans to undergraduate students.

Rates for student loans through credit unions can be considerably lower than what you can expect at a bank. Credit unions are more likely to work with if you have a poor credit history or do not have a co-signer. Credit unions’ rates are likely to be higher, however, than those for federally subsidized student loans.

If you plan on taking out a student loan with a credit union, you will be required to become a member of that institution. That means you will have to meet the criteria for membership, which could be the connection to the university you plan to enroll in as a student. You may have to pay a fee to become a member, which can range from $5 to $50.

A credit union may ask you to set up a checking account and make deposits at the institution before it can move forward with a student loan. Your credit score likely will be checked when you apply.

The majority of credit unions won’t make you start paying off the loan until you graduate. But once the grace period ends, credit unions usually have strict repayment terms. That may leave you with less flexibility in paying off the loans.

Credit Unions & Mortgages

Since credit unions have less available capital than big banks, they have generally stayed away from the mortgage business. However, the economic crisis demonstrated that big lenders may not have been doing a good job. As a result, the landscape of the mortgage lending industry may change in the near future, with credit unions possibly picking up some mortgage-lending opportunities.

The American Credit Union Mortgage Association (ACUMA) believes this is a good move. This group reports that many credit unions are evaluating whether they can fill the “vacuum” that resulted from the mortgage-lending pullback by big banks, as well as the collapse of many sub-prime lenders in recent years.

Beyond that, new government regulations may make it easier for credit unions to get in on what many consider a “cash cow” of the lending field. Because of the unique fees mortgages generate, real estate lending can be a significant source of income for a financial institution.

It remains to be seen whether America’s credit unions will take advantage of the opportunity. Still, if you’re in the market for a mortgage, it’s worth stopping by your local credit union to explore your options.

Choosing a Credit Union

If you think a credit union will give you a better banking experience, do some research on your own to find one you qualify for that also suits your needs. With nearly 8,000 credit unions nationwide, you’re bound to find a good fit in one of them.

Find out about the services each credit union offers, as well as its size. Some smaller credit unions may have to use a larger, national bank to issue services, such as credit cards. This would mean your credit union account would have to follow the same practices and fees typically issued by a for-profit bank.

Once you’re part of a credit union, you can expect more personalized service and better access to financial tools.

Al Krulick

Al is an award-winning journalist with dozens of years of writing experience. He served as a drama critic, high school teacher, arts administrator, theatrical producer and director. He also dabbled in politics, running twice for a seat on the U.S. House of Representatives for Florida. Al is a Certified Debt Specialist with the International Association of Professional Debt Arbitrators and specializes in real estate, credit and bankruptcy advice.

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