How Do Credit Unions Operate?
According to the Credit Union National Association, members of credit unions own and control credit unions and pool their resources to provide loans and financial services at more favorable terms. Common bonds govern credit unions and outline membership qualifications. Credit unions are becoming increasingly popular as alternatives to traditional banks and savings and loans institutions.
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Benefits of Using Credit Unions
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Because credit unions are member-owned, they are more responsive to member needs and strive to provide more favorable services than traditional banks, such as lower loan rates and free business checking services. These services can lead to significant cost savings compared to banks. Credit unions offer a more personalized service and even offer helpful business courses and seminars to small business owners. Because of stringent lending practices, credit union charge-off rates are also much lower than other financial institutions -- according to "Entrepreneur" magazine.
Who Can Use Credit Unions
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"Credit unions are for everyone," says the Credit Union National Association. Still, credit unions must have a defined field of membership by law. The unions' common bonds determine who can join. The area where members live, the community they work in or any association they may belong to, such as trade unions, schools and churches, can be the common bond that determines membership in a credit union. If your employer sponsors a credit union, for example, you can join that union.
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Credit Unions Versus Banks
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Credit unions, typically managed by volunteer boards, are not-for-profit cooperatives. These characteristics encourage credit unions to provide its members low-cost, flexible financial products, such as low interest rates and service fees. They may even entitle members to dividends. Because of their status as not-for-profit cooperatives, credit unions are exempt from many state and federal taxes. In contrast, outside stockholders own banks. Banks aim to maximize profits -- usually at the customer's expense.
Considerations
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The fact that a credit union's customer base is limited to its members is an important consideration. Even then you should weigh its advantages against the alternatives before making the decision to close accounts in other financial institutions. Be aware, for instance, that not all credit unions offer mortgages, and those that do are slightly pricier. Also, as of September 2010, a credit union's lending ratio is limited to 12.25 percent of its total assets, so a large bank may be more suitable for large loans.
Disadvantages of Using a Credit Union
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The services offered by credit unions can be limited in scope, especially when it comes to business accounts. Very few credit unions provide services such as business checking accounts or services related to merchant accounts, and less than a third offer business loans. Sometimes credit unions may be ill-prepared to handle certain accounts due to lack of expertise, products and contacts, especially when the company operates in the international market.
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