Financial decisions are some of the most important you’ll ever make, starting with the financial institution you trust to partner with you in taking care of your money.
There are many different types of financial institutions, and choosing the one that is best suited for your lifestyle and banking needs is the first step in managing your money well.
The two types of banks you might be most familiar with are retail banks, which serve customers in the general public, and commercial banks that are similar but focused mostly on business customers who require a more comprehensive range of services.
Retail banks can range in size from small, local, or regional banks to large banks with branches all over the country, but all offer similar services to their customers.
Online banks are very much like traditional retail banks, minus the in-person brick and mortar operation. These banks operate entirely in a digital space.
Usually, they have most of the same services as brick and mortar retail banks with lower interest rates on the loans they issue and higher rates on deposit accounts—due to the lower overhead since they don’t have a physical branch.
Hold on! Wait, we are forgetting an important one: credit unions.
Credit unions represent another standard financial institution popular among consumers. Credit unions are often touted as having better customer service than any other type of financial institution.
What are credit unions?
Unlike for-profit banks, which exist to generate profit for their owners, credit unions are not-for-profit. They are cooperatives, co-owned by their members who have a hand in running them by electing a volunteer board of directors.
Most credit unions offer all the same services as a retail bank but often pay higher interest rates to members on their savings accounts and charge lower interest rates on loans and credit cards.
That’s because, unlike banks, profit is returned to the owners or members in the form of better rates and other benefits like lower fees and educational programs.
Credit unions have membership requirements and usually an annual fee associated with them. Some affiliations are connected to where you work or worship. Others are through associations, causes you are actively involved in, or geography.
For example, if you serve in the Armed Forces, you will have several credit unions available to join that are unique for those in military service. There are credit unions for teachers, health care workers, and government employees, just to name a few.
Regional credit unions serve a particular geographical area. Some credit unions serve those affiliated with a specific religious denomination, association, or organization.
Most credit unions are smaller than retail banks and have fewer branches. Some have only one physical location but offer online banking for those too far away to handle transactions in person.
What is the origin of the credit union?
Credit unions date back to the 1850s-60s when a citizen in southern Germany suggested everyone in the community pool their resources.
If someone needed a loan, funds would be easy for them to access. It worked well for their community, and the credit union model was born.
The credit union first appeared in America in 1909 and has grown steadily ever since. You might mistakenly think the word union referred to a labor union, but it merely represented the fact that the members were united in some affiliation.
And even though early credit unions offered savings, insurance, and payment services in addition to credit services, the name credit union was chosen since the original purpose of pooling resources was to provide credit for those that needed to borrow money.
The name has stuck for more than 150 years, so it’s unlikely to change anytime soon.
What services are offered by credit unions?
Almost every credit union offers the same services that you’d find in a retail bank. The language might be slightly different, as credit unions sometimes use their own lexicon, but the services are the same even if described differently.
- What a bank would call a checking account, a credit union might label a share draft account.
- What a bank might identify as a savings account might be described as a share account by a credit union.
- Most credit unions have a par value, which is their way of stating the minimum deposit amount you must have to become a member and open an account.
Nearly every credit union offers mortgage services, lines of credit, deposit accounts like checking and savings, electronic banking through Automated Teller Machines, commonly known as ATMs, and a mobile app. Some offer rental of safe deposit boxes.
Federally backed student loans are available through most credit unions, as are auto loans.
Some credit unions offer educational opportunities, like classes for young investors or special student accounts that include support in training students to save for their future.
Many have retirement saving accounts and investment accounts, and professionals to help you plan and save for retirement.
Like banks, credit unions offer insurance coverage up to $250,000.00 to protect member’s funds from loss. Banks, not credit unions, are insured through the Federal Deposit Insurance Corporation or FDIC. Most credit unions are insured through the National Credit Union Administration.
That’s a mouthful but should give you peace of mind knowing that your money is just as safe from loss in a credit union as it is in a bank.
Some state-chartered credit unions are not federally backed and are privately insured instead. If you consider joining a credit union, check the website or call and ask about how your funds will be insured should you open a deposit account with them.
Accessibility and customer service
One noted disadvantage of credit unions is that they are not always as easily accessible as retail banks.
Credit unions usually have far fewer ATMs and branches than their traditional bank counterparts.
With fewer physical locations, it might be challenging to go in and conduct business in person. This could be discouraging and inconvenient for you if you prefer face-to-face interaction.
Many credit unions mitigate the inconvenience of their smaller real estate footprint by providing broad access to a network of ATMs with minimal or no fees for use. This is the chief complaint about credit unions—they are not in enough convenient locations for their members.
Since we’ve noted the primary complaint, we should also note that the quality that draws the highest praise for credit unions is their outstanding customer service.
Most studies show that credit unions rank higher than retail banks in the area of customer service.
When you consider that the customer is a member and that member is also an owner, it makes perfect sense that the credit union employees would want to please them.
When you factor in the commonalities of the credit union members based on the fact that they live near each other, work in the same field, or belong to the same organization, it’s easy to see why members of credit unions feel a sense of community and belonging.
That enhanced sense of community can positively impact the customer experience from both the employee and member points of view.
Recapping the benefits of credit unions
Since credit unions are member-owned, most of their financial products will be at better rates with lower fees than their traditional bank counterparts.
This means you’ll pay lower interest rates on your loans and receive higher interest rates on your savings.
A perfect example of the difference can be seen when comparing a bank-issued credit card to a credit union credit card. Almost half of the credit cards issued by traditional banks charge annual fees, but only a small percentage of credit unions do.
Late fees at a traditional bank are about double what you’ll pay to a credit union, and interest rates are higher at banks.
Fewer fees and better rates are definite benefits to choosing a credit union over a retail bank. But there are many more benefits, including the outstanding customer service credit unions are known for and the sense of community since you are co-members with people you have something in common with.
With the same services, including insurance protection against loss, and these unique benefits of being a credit union member, it might be time for you to take a closer look at any credit unions you might qualify to join. Do some research and see if joining a credit union might be a smart financial move for you.
Image by Can Pac Swire