Meaning Of Credit Union
Credit union refers to non-profit financial institution that is owned by a group of peoples who uses its range of financial products. These institutions are similar to traditional banks in terms of kind of products and services provided such as saving account, loans and credit card. However, these two differs from one another with respect to their goal. The traditional banks carrying out their activities for profit maximization, whereas credit unions are not-for-profit enterprises that operates for serving the interest of their members. Credit unions return whole amount of profit earned during their operations to their members in the form of more favourable rate of interest. All operations of credit union are managed by its board of directors who get elected via its member for safeguarding their interest.
These are owned, created and run by their members and enjoys tax exempt status due to their non-profit business nature. Credit unions focuses on serving their members by providing competitive products with lower fees and better rate in comparison to one offered by profit generating banks. However, they have a smaller variety of product offerings over bank. In addition to this, credit unions are formed to serve the specific regions, communities or businesses. They are well known for offering good in-person customer service at their physical branch locations.
How To Join Credit Union
The membership of credit union was originally limited only to peoples who shared a ‘common bond’ that is either they live in same community, work for same company or work in similar industry. However, in recent past, the requirements for membership of credit union have loosened, thereby allowing general public to take its membership.
Firstly, for becoming a credit union member, a person should either visit or call chosen credit union for confirming what all information is needed for joining the same. Once person gets connected with him, the credit union’s representatives will inform on joining process as this may differ from one credit union to another.
There are numerous credit unions nowadays, who do have websites and many ones also offering online application services for availing saving and loan accounts. They do have online account management and banking services that can be done either via website or mobile apps.
Any person can become member of credit union; however he/she should share same type of ‘common bond’ with other members such as: –
- Living in the same locality or area
- Working for same employer like other members
- Belonging to same trade union, association, school or church
- Any family member is already a credit union member
In case, if person does not meet any of the eligibility criteria for membership, there are still some chances for him to join. Many of the credit unions allots membership to peoples via joining its participating organization. All this comes with small amount of fees, although credit union may pay the same on person’s behalf.
For example, Alliant credit union provides membership via joining the charity Foster care to success, and Alliant pays fees of $5 on person’s behalf who is looking to become its member.
Also, in addition to fulfilling all of the eligibility requirements, a person may be required to pay one time membership fee and open an account by depositing a small amount of usually below $10.
As soon as person become member, he got the right to participate in credit union’s affairs. Person has a vote in choosing the board of directors as well as key decisions regarding the operations of credit union. Also, the voting ability of members is not based on how much money they put in their credit union’s account but all of them carry an equal vote.
How Credit Unions Differ From Banks
Credit unions and Banks seems to be similar but they aren’t the same. There are enough differences between the two that are as discussed in points given below: –
Who owns it
Banks are for-profit institutions and aims at generating money. Credit unions on the other hand, are not-for-profit organizations focusing on their member’s needs. The members at credit union gets vote power that they can exercise for policy changes and leadership, whereas there is no such option available at banks.
Who can join it
Any person having money can go and open an account with bank. But for credit union, even if a person has lots of money cannot become member without qualifying for membership. There are lots of option available for becoming a member of credit union based on your place of living and working. However, if person does not meet the prescribed qualifications, then also, he/she can become a credit union’ member via paying fees.
Who backs it
Every consumer wants that bank or credit unions should be safeguarded against loss or theft of any kind via means of insurance. The banks are secured by Federal Deposit Insurance Corporation (FDIC) and Nation Credit Union Share Insurance Fund (NCUSIF) safeguard the credit unions. Both of these are government backed agencies that will protect people’s cash. People should avoid putting their cash into banks or credit union that are not insured as it is simply taking high risk with your hard-earned money.
Fees charged by it
Banking firms charge higher amount of fees as compared to credit unions because banks aim at making money for their investors. There are multiple credit unions providing free account checking service with no minimum balance, whereas bank requires consumer to maintain large minimum balance for availing free account. Also, error fees such as of bounced check is much higher at banks.
Interest offered by it
Credit unions offer higher rate of interest on saving accounts and lower rates on loans. This is because credit union does not operate for making profit unlike banks but they are meant for serving their members. Banks focuses on making more and more money for increasing their investor’s wealth due to which they offer lower rate of interest on saving account and charges higher interest for loans.
Benefits Of Credit Unions
Various benefits of credit union are as listed below: –
Personalized customer service
Credit union offer more personalized services to its customers as they have limited group of customers as compared to large banks. Also, the local credit unions are formed and operated for providing services to a particular community around them, who themselves are its owners. They don’t have the target of making large profit like banks and are meant for serving interest of its members only. Credit union cares a lot about its customers and maintains personal touch with them, therefore offering personalized and responsive customer service.
The products from credit union comes with lower price and less fees. Large banks, however charges higher fees for its range of services such as credit card or account opening. There are many credit unions who waive off various types of fees associated with bank account and credit cards. For example, Platinum Mastercard provided by First Tech Federal Credit Union has transfer charges of $0 balance, for which most of the large bank’s charge 3% to 5% on per transfer.
Higher interest rates on deposits
The rate of interest on deposits made in saving accounts is much higher in credit union over the commercial banks. When customers receive higher yields on their deposits then this will ultimately be adding up to earning more money on their savings. This is because banks have motive of increasing their investor’s wealth via earning more money due to which they offer less interest rate on saving accounts. However, credit union does not focus on making profits but serve its members and return whatever profit is earned by them in form of more favorable interest rates to its customers.
Lower interest rate on loans and credit card
They charge lowest rate of interest on their credit card and other financial products. Credit union gives a great deal of money savings to its customers if they are willing to take out a loan. For instance, the Andrews Federal Credit Union offers a Titanium Rewards Visa Signature Card that carries variable APRs as low as 9.49% and no greater than 16.49%.
The credit union being focused on their members, often do many welfare things for peoples living in their local communities. They may provide scholarships or educational grant to college students or might pitch in with fundraisers.
Limitation Of Credit Union
The limitations of credit union are well-described in points given below: –
Credit union requires membership for a person looking to avail its services. Many times taking membership of credit union might become a hassle, in case, if person does not fulfil the eligibility requirements and does not want to pay for becoming member.
Less product offerings
They provides a very limited range of products or services over banks that offers a large variety of financial products to their group of customers. Customers at credit union can avail only basic banking service such as saving account, loan facility, and ATM cards. They might not get online banking or mobile app services as provided by most of the large commercial banks.
Limited branch locations
It has a limited number of physical locations being local to particular community only. Customers may face difficulty in visiting branch while they are travelling or in case, they are member who does not live in a nearby community. Under such scenarios, customers may not get services similar to banks that operates globally.
Less innovative technology
Credit union are smaller not-for-profit organizations having limited amount of financial resources. They have smaller budget for building app features or new website like most of the big commercial banks have. All this results in less advanced and innovative technology with credit unions as compared to banking firms.
Not all credit unions are insured
Every credit union is not insured and might pose risk to hard earned money of its members. Most of them are insured by Nation Credit Union Share Insurance Fund (NCUSIF) that guarantees up to $2,50,000 per individual depositor. But there are many who are uninsured also and this thing should be checked by every customer prior to taking risk with their money.