What is a credit union and why would you use one?

I see a lot of people getting loans with credit unions, usually they say they get cheaper rates there. What is the difference between a credit union and a bank? Does using one negatively effect your credit? I always viewed a credit union like one of those cheque cashing services that messed with your payments and credit, but I am not sure since I see so many people financing through them.

A credit union offers mostly the same services as a bank. Credit unions typically offer savings accounts, loans, lines of credit, credit cards, and investment accounts – all the same products banks provide.

What sets a credit union apart from a bank, in a organizational sense, is a credit union serves its members. To use a credit union you usually need to sign up and perhaps pay a small fee ($5, for instance) to become a member of the organization. Members can then make use of the credit union’s services and vote as shareholders in the organization.

In a practical sense, credit unions tend to be smaller or localized to a region. Often credit unions serve a single province, for example, rather than having branches nation-wide the way many banks do. Also, credit unions tend to just share profits among members, not generate profits for public stock holders the way banks do. There tends to be less focus on credit unions generating large profits. In other words, people can sometimes get loans at lower interest rates. Meanwhile investment accounts and savings accounts may generate more interest for members of a credit union.

Put another way, you might want to think of a credit union as a sort of locally owned and operated version of a big, nation-wide bank. They have similar insurance, similar guarantees, and are operated under the same sort of regulations as a bank.

A credit union is not like, and has nothing in common with, cheque cashing services or payday loan businesses. Using a credit union will not hurt your credit score, surprise you with hidden interest fees, or result in hidden payments.

People tend to like using credit unions because they can (sometimes) offer better rates on loans and savings accounts than traditional banks. Since “customers” are also members, customer service tends to play a bigger role in the credit union experience. On the other hand, credit unions are usually smaller and specific to a region, meaning people who travel or move a lot may find it less convenient to use a credit union than a traditional bank.