What is a Credit Union

The definition of a credit union is clearly laid out by the World Council of Credit Unions or WOCCU. According to the WOCCU website, a credit union is any non-profit “financial cooperative” that is owned by the members of the credit union and which offers financial services. Numerous credit unions are available around the world and might have different names depending on the location and country.

In simple terms, a credit union is a type of financial institution that the members own and operate in a similar manner as a bank. Unlike a bank, members of the credit union are able to cast a vote in the decision making process regardless of the size of their personal account with the credit union and are part owners of the credit union.

Credit unions also have restrictions on who is able to join, which will vary by credit union and the niche that the specific union serves. For example, it might require that you live in a specific local area or work in a specific company before allowing you to join.

How Credit Unions Differ From Banks

In general, a credit union and a bank offer similar financial services. For example, both a credit union and a bank might offer loans for various personal needs. As a result, many individuals might start wondering why it is not considered a bank and how it differs from the bank. Some of the reasons that it is classified differently are obvious, such as the member ownership, while other reasons are less obvious like the high interest payments on savings accounts.

The biggest difference between a bank and credit union is who is served by the company. A bank is owned by stockholders and strives to make high profits to please those stock holders. That means that a bank actually serves the stockholders rather than the customers putting their money into various bank accounts. As a result, customers of the bank might end up facing a myriad of problems like poor customer service or high interest on credit cards despite a flawless credit score.

A credit union does not serve stockholders because it is a private, member-owned institution and is considered a non-profit institution. The way a credit union works is that the various members pool their money together to provide loans and other financial services as needed by members. The result is that the members receive a higher interest rate on savings and are able to obtain lower interest loans if they have a flawless credit history.

Another difference between a credit union and a bank is the type of clients who put money into the institution. In general, a bank has no restrictions on clientele and most clients are middle to high income families. A credit union, on the other hand, has specific limitations such as belonging to the same church or living in the same area, so it provides services to a wider range of income groups.

The way in which the board of directors is selected also differs between banks and credit unions. In general, a bank will choose the board of directors from stockholder votes with the highest stockholders having a weightier vote. In a credit union, every member has one vote and the weight of the vote is the same, giving it a democratic election process instead.

While banks and credit unions make profits in similar ways, such as through interest paid on loans taken out by customers or members of the institution, the way that the profits are distributed differs. In a bank, profits are primarily given to the stockholders based on the number of shares owned. Credit unions differ because the profit is given to the members in the form of lower interest rates on loans, credit cards and higher interest paid into savings accounts within the credit union.

Banks and credit unions both provide all or most financial services. While this is true, credit unions will primarily focus on savings, credit and insurance. Banks will have the same focus on credit, but also encourage investment and might not put much focus on savings or insurance.

These primary differences make it clear that credit unions are often a great option for members who are interested. While the differences show many benefits of joining a credit union, people often have various reasons for joining a credit union that differs based on personal preferences.

Reasons to Select a Credit Union Over a Bank

The reasons members prefer to work with a credit union vary by situation and individual. While individual reasons might differ, some common reasons for choosing to work with a credit union are obvious.

One main reason many individuals choose a credit union over a bank is the customer service. In a bank, customer service is not always friendly and clients might face several hassles before anything is done. In a credit union, the environment is friendlier and customer service addresses concerns quickly and efficiently.

For some, the cozy environment is not enough draw to bring their accounts to a credit union. Instead, the offer of lower credit card and loan interest rates brings in members. Credit unions are able to offer a lower interest rate for good credit because it is not profit driven and does not need to answer to stockholders. Another financial feature that many members enjoy is higher interest earned on savings accounts.

For those interested in community service, credit unions are the place to look for helping the community. Many credit unions are involved in community projects due to their member orientation. Since the credit unions are often locally owned and operated, they are able to put more efforts into the needs of the community.

For others, the selective quality of the credit union is appealing. A bank does not put any limitations on who is a client and customers have no bonds. A credit union requires a common factor like belonging to the same church or community, which gives all members something in common.

Conclusion

When considering whether to join a credit union or put your money in the bank, it is important to remember the differences between banks and credit unions. In most situations, a credit union is the best option if you want low interest loans and credit cards, great customer service and high interest savings accounts. Credit unions look after your interests and that makes them more personal, cozy and friendly than any bank whose interest is the stockholder’s profits. A credit union is better than a bank for almost any potential customer or member who is eligible to join.

Ally Bank

• No maintenance fee to keep minimum balance
• Free use at any ATM
• 1.05% APY for balance of at least $15,000

ING Direct

• Free checking account
• Free use at any ATM
• Online checks for free

USAA

• No minimum balance for checking account
• No maintenance fees
• 10 free ATM withdrawals a month

Capital One

• Free checking account with no monthly maintenance fees and minimum balance

Alliant Credit Union

• High-rate checking
• No monthly fees
• No minimum balance

PNC

• Checking with no monthly maintenance and monimum balance
• Refunds for ATM transactions if balance is $2,000 monthly

The Incredible Bank

• High-yield checking account that pays 1.35% APY
• Free e-checking account
• No ATM fees

Charles Schwab

• Free checking account
• High yield checking account with no monthly fee
• Free ATM use with free refund from charges from other banks
• Free paper checks

Paying everything up front maybe scary since you get to absorb the full cost right away. In such an occasion where there will be no price difference in the total cash out against the total of installment plans, getting things at 0% interest is a good deal indeed.

However, if the payment plan involves paying interest, then you have to check how much you’ll have to spend in total.
With larger purchases that would require you to take up a loans (including mortgage) like with car and home purchases, you might be losing quite a lot with interest alone.

For cars, for example, zero down payments and small monthly payments often translate in longer terms and thousands
in interest. Combine that with the money you lose in depreciation and you might notice that you’ll end up paying for two cars.

The best way still is to pay as much as you can up front (full purchase, if possible) and draw it out with prime consideration for your monthly budget so as to minimize the money lost in interest.

Always think of the whole and longer term impact.

One way to help you manage this is to have your paycheck directly deposited to your savings account. The problem with having your income as cash on hand is that it’s easy to spend it making overspending very likely. Putting everything in your account helps you avoid that.

If you make it a chore for you to get your money, you’re less likely to tap into it occasionally. This should help your with the discipline of budgeting as well since you have to sort out finances before you make that special trip to the bank to get only what you need.

You can always make arrangements with your employer to do this. Just ask your accounting/finance or human resources if this is possible.

Credit cards are a no brainer. Hardcore personal finance advisers would tell you that there’s absolutely no need to get a credit card. It’s simply because, often times, you’d be using it buying everyday stuff that you should be able to afford with cash.

Now, larger loans such as housing and cars are different since they often alter the way you spend not only in a monthly basis but in general. Payments will factor in as a recurring expense and you have to adjust your lifestyle if you want to get out of debt fast.

Do the math. Low monthly payments but longer term, means you’ll be throwing away a lot in interest. So the key for large debts is to manage a couple of key factors: the equity that you can afford and the amount you can pay monthly.

The larger the down payment or equity, the lesser the loan (the lesser the amount on which interest will be slapped). The shorter the term, the lower the interest. So the key is to effectively configure them so that you pay as quickly as possible and pay as little as possible per month.

Just make sure that you can afford it before committing yourself to it.