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Pros and Cons of Credit Unions

For banking and other financial needs there are no shortage of options from brick-and-mortar banks to online banks and credit unions among others. When choosing to use a credit union, it’s important to consider all the pros and cons of these financial institutions. Credit unions are different than banks, not only in their structure and requirement of membership to use, but also in the benefits member enjoy versus customers of a bank. Take a few minutes and review the benefits and drawbacks to determine if going to a credit union is right for you.

Benefits of Using a Credit Unions

Great Customer Service

Credit unions are non-profit organizations that are owned by the members that use them. This system encourages credit unions to treat its members well, given they also own the credit union. It’s nice to walk in and be more than just a customer or worse yet only an account number. Members are more inclined to use the credit union for most, if not all, their financial needs when they can be sure to receive great customer service. This in turn creates more revenue streams (deposits with the credit union or interest from loans) for the credit union to use and reinvest in more ways to please its members.

Competitive Interest Rates When Borrowing Money

Having non-profit status exempts credit unions from some taxes. The savings from these taxes can be reinvested back into credit union. These tax savings can be passed onto the members with competitive interest rates (sometimes lower than rates offered at other banks) charged on loans. Lower interest rates can help make loan payments more manageable to repay and less likely to go into default.

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Higher Interest Rates on Deposits

With a focus on providing for its members over profits for shareholders, like a bank, credit unions can offer higher interest rates on deposits versus banks. Also you may notice a variety of savings and high-yield account options at your credit union Credit unions will use profits to better service their member-owners and provide value to them that would not be replicated in a bank where impressive financial statements are important to shareholders.

Lower Fees for Services

Fees such as monthly maintenance or service fees, ATM fees, overdraft fees, insufficient fund fees, and fees to process loans can be overwhelming. Credit unions will typically charge lower fees to its members as another way of offering outstanding service and value and to stand out from banks. Of course, these fees are still present, but the impact is not as deep to the pocketbook which makes them more manageable.

Members are Owners of the Credit Union

Credit unions are owned by the members that use them. It’s as if, the customers collaborated and created their own “bank”; one that offers everything they want and need and exists to serve them solely. They effectively pool their money together to share with one another and benefit each other. Members serve on a volunteer board of directors which manages the decisions made on behalf of the credit union and best serve the member-owners.

Credit Unions Foster Community Among their Members

Membership in a credit union is based upon a common bond, whether that be an employer, union or some other means for identifying a unique group of people. These common bonds paired with the new ties of shared ownership in the credit union, foster a community within the credit union unlike anything that could be found at a bank. Members genuinely want to work with, serve and benefit each other and this desire is founded in the common bonds they share.

Drawbacks of Credit Unions

Membership is Required to Use

When a customer wants to open an account be it a checking or savings account or maybe borrow money at a bank, one simply needs to go into the bank and apply. While some basic criteria will exist, no limiting prerequisite is required. When a customer wants to join a credit union, they must meet its membership requirements. If these requirements aren’t met, they will be denied membership and unable to use any of the products or services.

Meeting these specific requirements might be challenging if you don’t belong to a certain employee group, government agency or union, which make up the bulk of credit union members. That said, there are some ways to get around these limitations. Family members of existing credit union members are extended membership. Additionally, some credit unions only require you reside in a certain geography to join. It’s important to know what types of credit unions are located near you to understand what your options are for joining one.

Membership Fees and/or Minimum Account Balance

Membership is not only limited by meeting specific criteria determined by the credit union, membership also usually comes with a one-time “fee” upon joining. These fees are generally be somewhere between  $5 and up to $25 on average and typically represent the par value of one share, establishing ownership in the credit union. Once you purchase one share, you may notice that a savings account maintains the value of the share purchase.

Many credit unions will require you to maintain this balance (the cost of one share) in your account to maintain your membership. You may also be charged a nominal processing fee to set up your account. Given credit unions are known for reinvesting monies back into the credit union to offer benefits to its members, its highly likely the minimal cost of membership will be recouped in no time.

Not all Credit Unions Insure Deposits

If a credit union is a federal credit union and chartered by the NCUA (National Credit Union Administration) it’s safe to assume deposits are insured by the National Credit Union Share Insurance Fund up to $250,000 per individual depositor. State credit unions can purchase private insurance for deposits, but many choose to purchase insurance from the NCUA. While highly unlikely, it is possible for a non-federal credit union to not have deposit insurance. This is an important question to ask when considering membership.

Fewer Products and Services Offered

Banks are for-profit financial institutions focused on generating growth and profits for its shareholders. To continually maintain momentum, banks are frequently introducing new products or services in an effort to draw in new customers and obtain more business from existing customers.

For credit unions the focus is much different.  Credit unions strive to best serve their member-owners first, without overt consideration to growth or profits (especially when profits are reinvested back into the credit union to the benefit of existing member-owners). Due to this, there isn’t much of an emphasis to continually develop new products or services, but instead there exists a desire to offer the most important products and services and to do that quite well.

Limited Branch and ATM Locations

National banks are known for having locations everywhere. The convenience of finding a branch or ATM on nearly every street corner is one of the main draws of using a bank. Credit unions, being much smaller in nature, do not have nearly as many branches or ATM’s as banks. This used to be more of an encumbrance before the days of the internet, however, with online banking and the shift to digital means of payment, the need for physical branches and ATM’s has waned. But just in case you need to bank at a branch or ATM, many credit unions belong to a CO-OP that allows you to complete your banking at another member organization.

Choosing to use a Credit Union

Credit unions have many unique and noteworthy benefits: superior customer service, lower fees and interest rates, higher rates on deposits and the comradery of fellow member-owners. The downside of credit unions include: the eligibility requirements for membership and the payment of a member fee, fewer products and services and limited branches and ATM’s. If the benefits outweigh the downsides, then joining a credit union might be the right thing for you. Now with all the right information you can make the decision that’s bests for you.

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