What Is a Credit Union?
A credit union is a sort of financial cooperative that offers standard banking services. Credit unions may be founded by major firms, organizations, and other entities for their workers and members, and can range in size from tiny, volunteer-only operations to enormous enterprises with thousands of participants throughout the nation.
Credit unions are founded, owned, and managed by its members. As such, they are non-profit organizations with tax-exempt status.
- Credit unions are financial cooperatives that provide its members standard banking services.
- Credit unions have fewer alternatives than commercial banks, but they provide consumers with lower rates and more ATM locations since they are not publicly listed and simply need to generate enough money to operate.
- However, credit unions have much fewer physical facilities than most banks, which might be a disadvantage for consumers who want in-person assistance.
- Credit unions are not required to pay corporate income tax on their profits.
Understanding a Credit Union
Credit unions operate on a simple economic model: members pool their money (technically, they purchase shares in the cooperative) to offer loans, demand deposit accounts, and other financial goods and services to one another. Any cash earned is utilized to finance programs and services that serve the community and its members’ interests.
Requirements for Membership
Originally, credit union membership was restricted to persons who had a “common connection,” such as working in the same industry or for the same firm, or living in the same neighborhood. Credit unions have recently relaxed membership requirements, enabling the general public to join.
To conduct business with a credit union, you must first join by creating an account (often for a nominal amount).You immediately become a member and a partial owner. That implies you have a say in the union’s operations; you have a vote in choosing the board of directors and other union-related matters. The capacity of a member to vote is not determined by the amount of money in their account; each member receives an equal vote.
As of June 30, 2020, total assets in federally insured credit unions were $1.75 trillion.
Membership in federally insured credit unions increased to 122.3 million as of June 30, 2020, according to the National Credit Union Administration (NCUA).
Advantages of Credit Unions
Credit unions, like banks, begin their earning process by soliciting deposits. Credit unions have two unique advantages over banks in this area, both of which stem from their nonprofit status:
- Credit union profits are excluded from corporate income tax.
- Credit unions just need to make enough money to cover its daily expenses. As a consequence, they have lower operating margins than banks, which are required to grow profits every quarter by shareholders.
Credit unions may offer greater interest rates on deposits while simultaneously charging reduced fees for other services such as checking accounts and ATM withdrawals since they can operate with limited margins. In brief, a credit union may help members save money on loans, accounts, and savings.
According to NCUA statistics as of September 25, 2020, the nationwide average rate for five-year certificates of deposit (CDs) given by credit unions was 0.94%, compared to a rate of 0.78% at banks.
Credit unions provide lower interest rates on most mortgages, including 15-year and 30-year fixed mortgages, and may be an excellent alternative if you’re seeking to buy a property.
Credit union money market rates were also higher, with an average rate of 0.17% vs 0.12% at banks. While these distinctions may seem minor, they add up to provide credit unions a major edge over banks when vying for deposits.
Disadvantages of Credit Unions
Credit unions have fewer physical facilities than other banks, which might be a disadvantage for customers who want in-person assistance. Most provide contemporary services such as online banking and automatic bill payment. Nonetheless, the modest size of many credit unions may result in a reduction in the variety of services, technology, and accessibility.
Because smaller credit unions do not have the same technological budget as banks, their websites and security measures are sometimes much less modern. However, some mid-sized and larger credit unions may have mobile banking applications that compete with those of much larger for-profit organizations.
While credit unions supply the majority of the financial goods and services that banks provide, they sometimes offer fewer options. As of November 12, 2020, Bank of America offers 22 distinct credit card choices, ranging from rewards cards to student cards, but Navy Federal Credit Union (NFCU) offers just six. The State Employees’ Credit Union (SECU), the country’s second-largest credit union, provides one credit card.
With additional resources to devote to customer care and people, banks are staying open later and longer, frequently until 5 p.m. or 6 p.m. on weekdays and often on weekends. Credit unions typically keep regular banking hours (9 a.m. to 3 p.m., Monday through Friday), however bigger ones, such as SECU, operate a 24-hour customer care hotline.
Credit Unions vs. Banks
Credit unions are far smaller than most banks and are designed to service a certain area, industry, or community. However, just because most credit unions have fewer branches does not preclude them from having a reach comparable to that of large banks. Many credit unions are members of an ATM network that was created to help them increase their reach.
While credit unions must still produce enough to support its operations, the lack of the requirement to create profits allows for cheaper fees and account minimums, better savings rates, and lower borrowing rates for their members and shareholders.
Insurance on Credit Union Accounts
Credit unions are not insured by the Federal Deposit Insurance Corporation (FDIC). However, the NCUA, which was created in 1934, governs federally chartered credit unions as well as the majority of state-chartered credit unions. The Credit Union Locator may check to see whether a credit union is federally chartered and provide other information.
The National Credit Union Share Insurance Fund (NCUSIF), which utilizes government funds to back up shares (deposits) in all federal credit unions, is one of the NCUA’s primary functions.
The NCUA offers up to $250,000 in coverage for each person account, joint account, trust account, retirement account (such as regular IRAs, Roth IRAs, or Keogh plan accounts), and business account. For example, if you have a credit union and have an individual account, a Roth IRA, and a business account, your total shares are covered up to $750,000.
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