Credit Union Definition
A credit union is a financial institution that offers services like banks but is run by its members. A credit union is run like a financial cooperative society owned by members. Rather than making profits, a credit union is more invested in serving its members by accepting savings that offer better interest rates, offering loans with lower interests, among others.
A credit union can either be small-sized or a large cooperative. Usually, members come together to form a credit union while large firms and corporations sometimes form credit unions. Credit unions are not-for-profit financial cooperatives that offer attractive services than banks.
A Little More on What is a Credit Union
A credit union is owned and controlled by members, it is a financial cooperative where members pool money for the creation of the cooperative. With the money pooled by members, a credit union offers loans and other financial services at a low cost. The purpose of establishing a credit union is to help people, rather than making gains.
Given that credit unions are not-for-profit enterprises, they enjoy tax benefits and exemptions from the IRS. These financial institutions typically offer traditional banking services to members at a low or no cost. The income or profit generated by credit unions is used for funding socially responsible projects that serve the interest of its members and benefit the larger community.
Requirements for Credit Union Membership
There are certain requirements or criteria that members must meet before they can be members of a credit union. The major requirements are the following;
- Membership of a credit union is based on shared interest and common goals, individuals must share in the interest or objective of the cooperative.
- Usually, members of a credit union must be from the same industry or work in the same company.
- Opening an account with a credit union is another requirement for its membership. This also entails having enough money in the account.
In recent times, membership of credit unions has been opened to individuals who are nor in the same industry or working in the same company, but shared interest is necessary.
Advantages of Credit Unions
The advantages of a credit union are;
- A credit union is a financial institution that offers traditional banking services. It accepts deposits from individuals who open savings accounts with them and also offers loans with lower interest rates.
- While banks offer low-interest rates on savings and high-interest rates on loans, credit unions offer savings with higher rates and loans with lower rates.
- Credit unions offer attractive certificates of deposits that have better rates than the ones in the money market.
- Credit unions offer online services with fantastic features that attract them to modern users.
Credit unions are tax-exempted, they do not pay corporate income tax on the earnings. These institutions also have smaller operating margins that allow them to charge lower fees for their services and also offer high-interest rates on savings and low-interest rates on loans.
Disadvantages of Credit Unions
Despite that credit unions offer more benefits than banks, they have some dark sides. The major disadvantages of credit unions include the following;
- Credit unions do not have enough branches like most banks and are thereby inaccessible. Their few numbers are a drawback that causes people not to have access to their services.
- These financial institutions are often small-sized and have limited technology.
- The services offered by credit unions are limited, unlike banks that offer a long list of services.
- Credit unions have fewer resources and are not as flexible as banks and have enormous resources at their disposal.
Credit Unions vs. Banks
Credit unions offer traditional bank services and operate like most banks, but they are different from banks. While banks are larger in size and operation huge resources, credit unions are small-sized. Due to the size of credit unions, they also enjoy lower operating expenses that allow them to offer their services at lower charges.
Unlike banks that offer low interest on savings and high interest on loans, credit unions offer high-interest rates on savings and low interests on loans. Credit unions serve the interest of their members, rather than making profits while banks are established to make profits while rendering unique services.
Federal Credit Unions (FCUs) are regulated by the National Credit Union Administration (NCUA), it acts as an oversight body and helps put credit unions in order. All deposits made to credit unions are insured by NCUA. On the other hand, the Federal Deposit Insurance Corporation (FDIC) regulates banks.
NCUA was established by Congress to monitor the activities of FCU and provide insurance coverage for accounts opened with FCU, whether individual, joint, trust and retirement accounts. Not all credit unions are federal, some are domicile and run by states and enjoy coverage provided by the states.