What Is A Credit Union? (2024)

The first credit union in the United States was founded in 1909. Since then, this type of financial institution has grown considerably—there are now over 4,800 credit unions with more than 130 million members across the nation. Here’s a closer look at what credit unions are, how they differ from conventional banks and why you may want to consider becoming a credit union member.

What Is a Credit Union?

A credit union is a not-for-profit member-owned financial cooperative offering traditional banking services, including credit cards, loans and checking accounts. A credit union is owned, operated and controlled by the members who use its services. And because these nonprofit entities aim to serve members rather than maximize profits, members often enjoy reduced fees, affordable loans and higher savings rates.

To join a credit union, you’ll typically need to meet certain criteria, such as belonging to a specific group or organization, working for a partner company, living in a particular geographic region or having a relative who is already a credit union member. For example, Navy Federal Credit Union only allows active-duty members of the military, veterans, Department of Defense employees and their immediate family members to participate.

However, many other credit unions have relatively lenient membership requirements. In those cases, you can often join online by simply opening a savings account and making a small initial deposit—as low as $5 in some cases.

How Do Credit Unions Work?

When members deposit their money into credit union accounts, they create a communal pool of money used to provide loans to other members. Think of it like a shared piggy bank that funds one member’s loan with another member’s savings.

For example, imagine you deposit $5,000 into a credit union savings account and leave it there for two years. During that time, your $5,000 will accrue interest, and your credit union will lend that money to other members who need loans. When you decide to withdraw your funds, you’ll receive your initial deposit plus the interest accrued. And in the unlikely event that the credit union fails before you make a withdrawal, your deposits are insured up to $250,000 by the National Credit Union Administration (NCUA).

Any income the credit union generates through interest, fees and loans is then used to fund community projects, reinvest into the organization or provide services that directly benefit members, like paying higher savings interest rates.

Credit unions are usually operated by a board of directors consisting of volunteers elected by the other members. These volunteers are responsible for overseeing the organization and deciding on the credit union’s direction. Credit unions typically hold annual elections, during which the general membership votes to determine who sits on the board of directors.

Credit Union vs. Bank

So, what’s the difference between a bank and a credit union?

While credit unions and banks both offer banking services, the former’s main goal is to promote the well-being of members, whereas the latter may prioritize shareholders over customers.

Because traditional banks are for-profit, they aim to make a profit for shareholders. To do so, they’ll typically minimize the interest they pay you on your deposits and maximize the interest they charge for lending you money.

On the other hand, because credit unions are not-for-profit, profits tend to be redirected back to members in the form of higher interest rates on savings accounts and lower fees on loans and credit cards. According to the National Credit Union Administration (NCUA), the national average rate for five-year certificates of deposit offered by credit unions was 2.66% as of March 2023, compared to 1.83% at traditional banks.

Another key difference between the two is credit unions tend to be smaller in size, have fewer brick-and-mortar locations and offer a less diverse range of products compared to traditional banks.

Who Owns a Credit Union?

Credit unions are entirely member-owned. If you bank with a credit union, you’re considered a member. In other words, as a credit union member, you’re not just a depositor like at traditional banks—you have an ownership interest in the institution.

Characteristics of Credit Unions

While credit unions offer similar banking products to traditional banks, they boast some unique qualities that set them apart.

• Community-focused. Credit unions are often brought together by a common interest and formed to serve a specific geographic community, organization or industry. This focus on a small community creates a more personalized experience for members compared to larger traditional banks.
• Lower borrowing rates and higher deposit yields. Credit unions pass profits on to members through affordable banking services. This member-first approach usually results in lower fees and higher returns on deposit accounts.
• Diversity and inclusion. The National Association of Federally-Insured Credit Unions (NAFCU) found that credit unions have ten times as many women serving as CEOs compared to traditional banks. There are also three times more credit union minority depository institutions (MDIs) than traditional bank MDIs.
• Free educational resources. Credit unions often provide no-cost financial literacy education, financial health consultation, seminars, articles and other tools to help members sharpen their money management skills.

If you’re eligible for the membership, choosing to bank with a credit union could give you access to more personalized service, competitive rates and lower fees than what you’d get at a traditional bank.