Credit unions can be a good home for your financial activity, especially when it comes to loans. Unlike banks, they are nonprofits owned by their members, so they can be more flexible with the interest rates they charge.
However, credit unions might not be right for everyone. Consider your priorities to determine if joining a credit union is the best option for you.
Here are some of the pros and cons of credit unions.
The Pros
Better Interest Rates on Loans
Compared to traditional banks, credit unions typically offer higher rates on savings and lower rates on loans. You can take advantage of these better rates to put your financial life on a firmer foundation.
For example, if you have high-interest loans and are struggling to keep up with your monthly loan payments, joining a credit union and refinancing your loans might make sense.
High-level Customer Service
People generally come before profits at credit unions, because anyone who joins is considered a member rather than a customer. Members receive high-level, personalized customer service.
As a valued credit union member, you can expect respect and care no matter where you stand financially.
Lower Fees
Credit unions don’t pay federal taxes, so they usually charge lower fees. They also have fewer fees than banks.
A Variety of Services
Before joining a credit union, check into the services they offer. Many credit unions offer services similar to those you will find at banks, including:
- Checking and savings accountsÂ
- Credit cardsÂ
- Mortgage loansÂ
- Vehicle loans
- Money transfers
- Online banking
- Financial literacy resources
If you are looking to build credit and save money, joining a credit union might be a good option. However, it’s important to also be aware of the downsides that come with credit unions.
The Cons
Cross-collateralization
Credit unions have more latitude than banks to collect on unpaid loans. This is due to a concept called cross-collateralization.
Let’s suppose you have a mortgage, credit card and checking account at the same credit union. If you were to fall behind in payments on the credit card, the credit union could take the money out of your checking account, which might cause your mortgage check to bounce.
In comparison, a traditional bank must get a court order before taking money from either your checking or savings account to cover a delinquent loan, even if both the checking account and loan are at the same bank.
One way to deal with this reality is to keep your checking and savings accounts at a bank and your credit card, auto loan and mortgage at a credit union. Doing so means your checking account won’t be cross-collateralized with your debts.
This will protect you from the danger of having money taken out of your checking account to pay an auto loan or mortgage.
Fewer Branches, ATMs and Services
Generally, credit unions also have fewer branches and ATMs than banks. However, some credit unions have offset this weakness by joining networks of surcharge-free ATMs.
Also, some credit unions also do not offer as many services as banks, so it’s important to learn what they offer before opening an account or applying for a loan.
Membership Is Sometimes Restricted
The biggest con to credit unions is that in some cases, you must be a member of a specific group in order to join.
For example, a credit union might restrict membership to those who work for a specific company. However, many other credit unions open their membership to just about everyone.
Is It Better to Belong to a Credit Union or a Bank?
When choosing between a credit union or a bank, consider what is most important to you. If lower fees and better rates are the most important factors, a credit union may be the right choice.
However, a bank might be a better option if you are looking for more convenient access to your finances.
If you do plan to join a credit union, make sure your deposits are insured. While the National Credit Union Administration insures accounts up to $250,000 for most credit unions, some remain unprotected.
