Advantages and disadvantages of credit unions

October 3, 2023

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Credit unions have much in common with banks, but they also have some important differences. Unlike banks, credit unions are nonprofit financial institutions owned by their members, which gives them some advantages over banks.

Although they offer many of the same products and services as banks, credit unions have some disadvantages. Here are the advantages and disadvantages of credit unions.

Advantages of credit unions

Lending rates are lower and returns on deposits higher. Profits of credit unions are returned to members, who are the shareholders. This allows credit unions to charge lower interest rates on loans, including mortgages, and to pay higher yields on savings products, such as share certificates (or CDs).
Lower fees. Federal credit unions are exempt from federal taxes. As a result, they tend to charge lower fees and fewer charges on checking accounts and other products.
Variety of products. Large credit unions offer product lines that rival those of many banks, including checking accounts, savings accounts, money market deposit accounts, stock certificates, mortgages, auto loans, student loans, and credit cards.
Insured deposits. If a credit union is a member of the National Credit Union Administration, member deposits are federally insured by the NCUA's Share Insurance Fund up to $250,000 per depositor.
More personalized service. Credit unions are typically local or regional, which means that service can be more personalized.
Educational resources. Credit unions tend to focus on financial education. It is therefore common for them to offer seminars, articles, calculators, and other tools to help members improve their financial skills.

Disadvantages of credit unions

Mandatory membership. Credit unions require their customers to be members. Account holders must meet eligibility criteria in order to use the products and services. However, membership requirements are often flexible, and a $5 deposit in a savings account may be sufficient to become a member.
Rates are not the best. You are likely to find a higher annual percentage yield (APY) on a stock certificate or savings account, or a lower rate on a loan at online banks, which do not have the costs associated with branch maintenance.
Limited accessibility. Credit unions generally have fewer branches than traditional banks. A credit union may not be close to where you live or work, which can be a problem unless the credit union is part of a shared branch network and/or a large ATM network such as Allpoint or MoneyPass.
It may offer fewer products and services. Small credit unions may not offer as many loan and deposit products as large credit unions and banks. They may also not offer the latest technologies, such as online banking, mobile banking, and peer-to-peer payment platforms like Zelle.

Banks and credit unions: what are the differences?

Banks and credit unions often offer the same products and services, but there are some notable differences.

Banks are for-profit institutions that generally charge higher fees and require higher deposits and minimum balances to open and maintain accounts. Banks pay taxes, while credit unions are nonprofit institutions that do not pay federal taxes.
Banks are accountable to shareholders who want to maximize their profits. Credit unions return all their profits to members, paying higher interest rates on deposits and lower interest rates on loans.
To do business with a credit union you must become a member, whereas banks are generally open to everyone. You can join any bank and apply for a loan or open an account without having to meet any membership requirements.
Traditional and online banks tend to offer more digital tools to their customers, such as mobile banking and online banking. Credit unions, especially smaller ones, may be less technologically advanced.

Choose between a credit union and a bank

Do you prefer mobile banking to in-branch banking? Is growing your savings a priority? If you are trying to decide whether to join a credit union or choose a bank, think about what you need most and what you want most from a financial institution.

Once you have a clear idea of what you are looking for, Finwower's lists of the best banks and credit unions can help you find the best options. Make a short list of your favorites, then compare the products and features that interest you most.

Once you've made your choice, it's time to open an account.

At a Glance

A credit union may be a good option if you are looking for a higher average annual return, lower borrowing costs and a closer relationship with a financial institution. Review the pros and cons of credit unions, do your research, and make the right choice for you.

Written by

Irene Scott

Insurance

I’ve worked for more than 5 years as a Credit Analyst and more than 4 years as an Internal Auditor for one of the leading global financial institutions. I have been exposed to the credit review process, various banking products, financial security topics, corporate governance, operational risk, and the internal control framework of a complex, multinational organization.