The Benefits and Drawbacks of Credit Unions

By Flexo on 10 March 2011 (Updated 2 September 2013) 20 comments
Photo: HowardLake

It's difficult not to be annoyed by traditional banks. Many financial institutions just don't have incentives to provide better and less expensive services. Although some have begun to adapt to changing needs and desires in the industry, most brick-and-mortar banks still don't feel threatened. Because banks aren't meeting the needs of some consumers, more people are turning to credit unions as an alternative. (See also: Beating Bank Fee Increases)

A good friend of mine, a business owner, shared with me his concern about his finances. Thanks to his success, he has cash that he wants to be available for his business's leaner times, and he was unsatisfied with the savings rates he could find — even with high-yield online savings accounts. We were able to find a credit union that not only offered better interest rates for savings, but allowed him to qualify for a business line of credit at a low interest rate.

These pricing benefits are just some of the advantages of working with a credit union. Any type of banking institution has benefits and drawbacks. Here are the issues that you need to consider before ditching your current national bank and joining a credit union.

Advantages of Credit Unions

Customers are owners.

The executive management of any company must answer to its owners. With a publicly-traded banking institution, shareholders care about only one thing: making money. In these companies, management often makes decisions that benefit the shareholder but inconvenience the customer. Shareholders might be happy when a bank decides to charge a new fee to increase revenue (and as a result, the stock price), but those who use the bank's services do not want additional fees.

With credit unions, the set of owners and the set of customers are one and the same. All decisions should benefit everyone.

Credit unions are non-profit.

Non-profit status means that more of the profits are shared with the owners/customers. That doesn't mean that the institutions can't earn a profit; any business needs to earn money to survive. The difference is that there isn't a pressure to find ways to make money off the customers. Additionally, credit unions benefit from exemption from federal tax, and that saved expense help more of the unions' revenue to be put to work.

There are fewer fees and higher savings rates.

As a result of the advantage listed so far, credit unions typically offer free accounts with no minimum balance requirements. Fees are generally absent from credit unions. Interest rates on savings, certificates of deposit, and some checking accounts often significantly exceed those offered by banks. In the same respect, interest charged for loans and credit are often lower. In fact, some credit unions are regulated such that the interest rate on loans and credit cards must not exceed a certain rate.

Disadvantages of Credit Unions

Access to new technology is limited.

There certainly are drawbacks to being a non-profit. Credit unions often do not have the funds to invest in technology. As a result, some credit unions' websites appear as if they belong in a bygone era. I've come across a few credit unions that still do not have a website that allows online account access. The level of technology varies greatly from one credit union to another, and some credit unions do have full-featured web-based technology, but it's worth auditioning a website before committing to a new credit union if accessibility is important to you.

They have fewer ATMs.

With a national bank, I know that I could travel anywhere in the country, and perhaps internationally, and find ATMs from my bank to avoid unnecessary fees. Credit unions are often community-based groups with no capital to install ATMs in convenient locations. Credit unions often get around this limitation by allowing you to use an existing network of ATMs, and if that ATM's owner charges you a fee for its use, the union will refund that fee on your statement. Be sure to read the fine print of your agreement to determine whether you will be able to find free ATMs near you.

Membership is restricted.

Credit unions are often focused on a certain community — most often either a geographic location or a profession. This has created the impression that it can be difficult to find a union for which you qualify. You might find that you're not eligible for the credit union that looks most appealing to you, but just about everyone can find a credit union to join. For example, Pentagon Federal Credit Union is generally only available to those who are U.S. government employees and a few other select groups, but anyone else can also qualify with a $15 donation to an organization.

Additional Information

Your deposits at credit unions are insured, just like your deposits at banks. The FDIC is the government organization that ensures that your bank balances are safe, even if the institution fails, up to a certain amount. Credit union balances are protected by the National Credit Union Association (NCUA), another government entity, for the same amounts. Always check to ensure your credit union is legitimate by verifying coverage through the NCUA website.

Like banks, credit unions often offer a full suite of financial products, such as credit cards, mortgages, debit cards, business loans, and checking accounts. Their non-profit status means that most do not have the funds available for major marketing and advertising campaigns, so it's difficult for the public to get the information needed to make an informed choice between banks and credit unions. It may require some research, but it is worth the potential savings and service.

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Guest's picture
MoneyIsTheRoot

Im sorry but I disagree with just about every disadvantage you list about credit unions. Yes it is true that some lack technology of the larger institutions, but my tiny credit union (and many others) have been using online banking for several years. In fact, some have been using it longer than the big banks, and the credit unions are still the most likely to offer it for free.

Also, if they are part of the Credit Union Family Service Centers, then they probably have a greater amount of ATMs than most banks do. In addition, they are also fee free. Cant say that about other banks.

Almost anyone (in fact, im sure its everyone) can join a credit union. Very few are sticking with their selective criteria these days. Typically if you live or work within 5 miles of one, they will allow membership.

Other benefits include low APR credit cards...my credit union offer a fixed rate of 7%, I cant even find another credit union that offers a card that low. They are mostly fee free institutions, and the big banks like BOA and Chase are going fee crazy these days!

www.moneyistheroot.com (personal finance blogger and Yakezie Challenge member)

Flexo's picture
Flexo

It sounds like your credit union -- like many others -- is aware of the potential disadvantages and has worked to improve them. Not every credit union has. It's possible to find credit unions like yours that do not have these disadvantages, but since they still exist for many, it's only fair to include them here.

Guest's picture

My credit union (secumd.org) is also constantly updating their online presence and have partnered with vendors to provide bill pay and other benefits where they are weekended. Almost anyone in Maryland can find a way to fit into the criteria.

And most credit unions have an ATM partnership program such as Allpoint that allows you to use any atm within the network. If I travel, I can find an ATM. I would say that actual branches would be the disadvantage. ATMs really are not a problem.

Guest's picture
Sid

To your point of fewer ATMs, I have found the exact opposite. My credit union membership comes with a system of 30,000 ATMs all across the country. I've traveled from coast to coast and can make a surcharge free withdrawal wherever I am.

Credit Unions are interesting in that they don't always see each other as competition. They know that to compete they need to cooperate with each other.

If you want a good laugh, www.bankerspank.com has some funny parodies of the old Mac/PC commercials.

Guest's picture
Michael

Those videos were pretty funny haha

Andrea Karim's picture

I have a hell of a time finding a credit union ATM when I need one, even though there are quite a few aorund my region. My credit union does appear to have partnerships with other credit unions in the area, though, so that's kind of helpful.

The ATMs that I DO find, though, are modern. Unlike, say, US Bank, which uses something from the 1970s.

Guest's picture
Guest

Andrea - have you checked this site? You should be able to use the ATMs at any credit unions without fees.

http://www.co-opfs.org/public/locators/atmlocator/index.cfm

They even have an iPhone app!

Guest's picture
iPlaid

I would also like to add that as "SID" said, Credit Unions do not see each other as competition, so they very often will work together on projects and services to do what is right for their members. My credit union gives me access to over 60,000 ATMs all across the country that are fee-free. There is an android app/iphone app that helps me to locate one when I need one. Also, my credit union gave 1 million dollars back to its members this past year in the form of a bonus dividend. Show me a bank that gives back to its customers like that.

You may think that "technology" that some banks offer is a benefit - sure it is - to the banks! Things like BofA's Keep the Change is a ruse to get you to use signature based transactions because they're cheaper fees for the banks! They're making money, not giving you money.

Don't believe all the propaganda - the big banks are evil and if you can, move your money to a credit union where you matter...

Guest's picture
MoneyIsTheRoot

@IPLAID - To be fair, banks cant give free money to their customers, because it needs to go back to their owners, the shareholders. Same group of people see the returns, it's just that they are two different classifications.

That being said... the big banks are pretty much evil. They truly exist because of the capital they hold... smaller banks and credit unions dont have the funds to lend out like the larger institutions do. However, in our case, you really dont need to be affiliated with a bank period. Credit unions will suffice and excel in every single aspect!

www.moneyistheroot.com

Guest's picture

Regarding the "fewer ATMs" drawback: many credit unions are members of what's called the National Co-Op Network, which means that you can use any "member" ATM in any other part of the country without getting hit by a charge.

I'm a member of a Colorado-based credit union, and I now live in Atlanta. Since I'm lazy, I didn't bother switching to a Georgia credit union ... I maintain the original account, and simply do my banking with the Georgia branch and with the Georgia ATMs, since they belong to the same national co-op network.

Guest's picture
MoneyIsTheRoot

That's another reason that credit unions have such great customer retention. This just goes to show you how little they compete with each other.

www.moneyistheroot.com

Guest's picture

I am a fan of credit unions but my husband is not. He wants to stick with his bank because he and his family have banked there forever... Don't really see the logic in that and I think banks are evil too!

Guest's picture
Guest

Credit unions are not-for-profit and not non-profit. Big difference. Look it up.

Meg Favreau's picture

Hi Guest,

You bring up a good point in that we don't want people to confuse not-for-profit credit unions with what people typically consider non-profit organizations; the way the two generate operating funds is different (http://en.wikipedia.org/wiki/Credit_union#Not-for-profit_status_and_the_...). However, calling credit unions non-profit is accurate. In fact, the National Credit Union Administration uses that term in its description: "A federal credit union is a nonprofit, cooperative financial institution..." (http://www.ncua.gov/Resources/CreditUnionDevelopment/aboutCUs.aspx)

Best,
Meg

Guest's picture
Guest

Seems the credit union im looking at joining has twice as many atm locations as my current bank. Both have online banking and bill pay. Only problem is there are only a few main offices, luckily they are right next to work .

Guest's picture
Donna

You listed disadvantage of Credit Unions that I disagree with.
Access to new technology is limited - depends entirely on the credit union.

They have fewer ATMs. - I disagree. By using ATM networks such as the Allpoint ATM Network, my credit union provides access to 43,000 surcharge-free ATMs to its members nationwide... that's more than some Big Banks. Learn more at http://www.allpointnetwork.com/

Membership is restricted. Yes, most credit unions are limited to a specific "field of membership", however, it could include a large geographic area; for instance my credit union serves all of Harris County TX (3rd most populous county in the US). They use Credit Union Service Centers around the country that can handle routine transactions for their members. This is why they don't have to have a branch on every corner like Big Banks... It also means they don't have to PAY for a branch on every corner... much lower overhead costs. Learn more at http://www.cuservicecenters.com/

Those of us who bank at credit unions appreciate the increase press we've been getting recently but wish you'd take the time to learn more about us before comparing us unfairly.

Guest's picture

The benefits are there are supposed to be lower fees (although now that most banks offer free checking, that point is slowly becoming less important). The customer service is better.

The disadvantages are that credit unions usually have more strict rules than banks. If you deposit a large check, they are more likely to put a hold on it than a bank. The hours are usually less convenient. They will also have fewer ATM's.

I have dealt with banks and credit unions, and I'm back with a bank. The difficulty of dealing with a credit union wasn't worth the extra penny in interest I got every month in my savings compared to the bank.

Guest's picture
Ryan O'Reilly

Good Lord, Devon, the reality that I've found is exactly the opposite. Banks, big ones at least, are doing away with free checking. It's all about maximizing shareholder profit with them!

I've banked with small banks and enjoyed the experience thoroughly. But those small banks get absorbed by huge banks. That huge bank is a nightmare to deal with, with new fees every time you turn around. Since I had to switch anyway, I switched to a credit union and I'm not going back!

Guest's picture
hadenough

Once upon time, in a land far away . . . Banks helped their customers to make money. Nowadays they make money from their customers! We have had business accounts with multiple Australian banks and they have let us down repeatedly. Only the Credit Unions have stood shoulder to shoulder with our enterprises and helped us to succeed. We have complete on-line business facilities and trade world wide with multiple banking and financial institutions without worry, no excessive charges and complete confidence in the Credit Union concept. We have even received a Member's bonus payment from our Credit Union. Subsequently, we have closed all of our Australian Banking accounts (Commonwealth, Westpac, BankSA) because they were predatory! Advice: Don't delay join a CU today!

Guest's picture
Carol

Having worked in credit unions for a good portion of my adult life, I agree there are wide variations in the services offered. Many of us participate in a "Shared Branch" network that gives our members access to thousands of branches tens of thousands of ATM locations all over the country. Participants allow members from other participating credit unions to do business in their branches and through their ATMs at no cost to the member. Many of us also offer good, solid technology for accessing accounts.

Carol Szaroleta
Destinations Credit Union
Baltimore, MD