I took out several student loans for graduate school; the one with the lowest interest rate – by far – came from a credit union. I was impressed with its low rates and prompt customer service, but I still had one question: what is a credit union?
Having used traditional banks my whole life, this was my first time dealing with one. Since then, I’ve discovered that credit unions have serious advantages for their members.
Credit unions are non-profit collectives that offer low rates and great terms. Read on to learn more about credit unions, and the pros and cons of a credit union versus a bank.
What is a credit union?
Credit unions are cooperative financial institutions owned and operated by their members. Credit unions are run by a board of volunteer directors with a focus on helping members succeed financially. This structure differs from a bank, which is a for-profit business beholden to stockholders.
Credit unions offer the same financial products as banks, including checking accounts, savings accounts, loans, credit cards, and certificates of deposit (CDs). Members can use any of the 30,000 fee-free ATMs in the credit union network, as well as conduct transactions in person at any branch around the country.
To become a member, you must meet certain requirements. Some credit unions are available to those who work or study at a certain school, such as the credit union I joined to get a graduate school loan. Others welcome members based on location, employer, family, or membership in a group (a place of worship, labor union, or homeowner’s association).
Here’s one other difference you should know about a credit union versus a bank — credit unions have a different vocabulary. Checking accounts are called “share draft accounts,” and savings accounts are usually called “primary share accounts.” These terms reflect the fact that credit union members aren’t customers, they’re partial owners.
Credit union vs. bank: what are the advantages of credit unions?
1. Higher rates of return on deposit accounts
Credit unions typically offer the highest rates of return on deposit accounts. Alliant Credit Union, for instance, offers a 1% annual percentage yield (APY) on savings accounts. The basic savings account at Citizens Bank offers only 0.01% APY.
Credit unions also offer higher interest rates on CDs. According to a credit union versus bank comparison by independent company SNL Financial, credit unions offer CD interest rates of 1.34%. Banks average interest rates of 1.15%.
2. Lower interest on loans and credit cards
As I mentioned, my lowest student loan interest rate came from a credit union. Credit unions also tend to give low rates on car loans and credit card loans. SNL Financial, found that the average 60-month new car loan from a credit union had a 2.71% interest rate. The same loan from a bank averaged a 4.65% rate.
3. Lower transaction fees
Credit unions typically charge fewer and lower transaction fees than national banks. Unlike banks, many credit unions don’t require a minimum balance in checking accounts and don’t charge a monthly service fee.
If you overdraw from your account, the credit union will likely charge a lower overdraft fee than a bank. Alliant Credit Union, for instance, charges $25 for non-sufficient funds. Citizens Bank charges $35.
4. Attentive customer service
Finally, the best credit unions value prompt and helpful customer service. You probably won’t get an automated menu of options when you call your credit union. Instead, you should be able to connect with a person right away. Additionally, credit unions offer financial resources to educate members.
What are the disadvantages of credit unions?
1. Not a ton of ATM locations
If you’re a part of a credit union, you can use any ATM in the co-op network or other partner. However, you may still find there aren’t as many locations as a national bank. This can especially be a problem if you’re traveling internationally.
2. Fewer financial products
Not all credit unions offer the same range of financial products as national banks. If you have specific needs, a credit union may not be able to meet them fully.
3. Less appealing credit card rewards programs
Credit unions don’t always have credit cards with the most lucrative rewards. You may not find the same sign-up bonuses or ongoing rewards programs as you would from a private lender.
4. Less advanced online services and app functions
Credit unions have a reputation for not being as up-to-date with online services and mobile banking as national banks. Whether this is still true is a matter of debate. Regardless, if technology in banking is important to you, you should research a credit union’s services before joining.
Should you join a credit union?
If you’re looking for low fees and high rates of return, then joining a credit union could be a great option. Many members also enjoy the non-profit, cooperative structure of credit unions.
Before joining, look into the potential disadvantages to see if there are any deal-breakers. If you’re torn, you could also consider keeping accounts in both a credit union and a bank. You could use the credit union for your savings or to take out loans. Then you could rely on your bank for a checking account and international transactions.
Where to find the best credit unions near you
There are over 7,000 credit unions in the U.S. with over 100 million members. To find the best credit unions, check out CUNA’s useful “credit union locator” tool. Some credit unions require specific associations. Others let anyone in the area join with a deposit between $5 and $25.
By looking into the best credit unions, you can find a financial institution with the best rates, fees, and products to meet your financial needs. For more on how to choose the right checking account, check out this guide. To compare transaction fees at various banks, head over to the banks page of the Student Loan Hero Marketplace.
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|Lender||Rates (APR)||Eligible Degrees|
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|2.54% - 7.38%||Undergrad & Graduate||Visit SoFi|
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|2.72% - 6.49%||Undergrad & Graduate||Visit CommonBond|
|2.88% - 8.34%||Undergrad & Graduate||Visit Citizens|