What is a credit union?

From first glance, credit unions appear to be just like a typical bank and offer many of the same financial products. But a closer look shows how they operate differently and offer unique benefits.

The next time you plan on opening a credit card or putting money into a high-yield savings account, you should check out the financial products that credit unions offer, since you may receive better terms than from a bank. With numerous options to choose from, both in your local community and beyond, you should  know a few basics about how credit unions work.

Below, CNBC Select explains what a credit union is, how it differs from a bank, how to become a member and the pros and cons of banking of opening an account.

A credit union is a nonprofit financial institution that's owned by the people who use its financial products. Credit union members can access the same kinds of products and services as offered by a traditional bank, such as credit cards, checking and savings accounts and loans. Members elect a board of directors to manage the credit union to ensure that their best interests are represented.

Credit unions aim to serve members by offering competitive products with better rates and fees than you see with a for-profit bank. Like a bank, credit unions charge interest and account fees, but they reinvest those profits back into the products it offers, whereas banks give these profits to its shareholders.

Since a credit union is owned by members, you'll need to meet eligibility requirements in order to qualify to open an account, apply for a credit card or take out a loan. The eligibility requirements differ across credit unions, which we explain more in depth below.

While credit unions are similar to banks, there are a few factors that set them apart. Here's a breakdown of the main differences:

The main difference between credit unions and banks is that credit unions are nonprofit, member-only financial institutions, whereas banks are for-profit institutions open to anyone. In addition, credit unions were often created to serve specific regions, communities or businesses, so they are known for providing better in-person customer service at their physical branch locations.

You may have a smaller selection of product offerings with a credit union over a bank. For example, a credit union may only offer one or two credit card options, compared to a bank that may have a dozen choices for all kinds of lifestyles.

However, fewer products doesn't mean less competitive offerings: Credit unions offer some of the best terms thanks to how they reinvest profits back into their products.

When it comes to deposits for checking and savings accounts, it's important to make sure the money you deposit is insured. Thankfully, most credit unions provide the same $250,000 insurance that banks do. However, there's a small difference: Credit unions are insured by the National Credit Union Administration while banks are backed by the Federal Deposit Insurance Corporation (FDIC).

You can become a member of a credit union in many ways, but each has its own requirements. You may qualify if you live in a certain town or work with an eligible employer. Another option may be through affiliation with certain groups, such as labor unions or schools. You may also qualify if one of your family members is already a member of a particular credit union.

If you don't meet any of the eligibility requirements, there may still be a chance you can join. Some credit unions allow you to become a member by joining a participating organization. This sometimes comes with a small fee, though the credit union might pay it on your behalf.

For instance, Alliant Credit Union allows you to become a member by joining the charity Foster Care to Success, and Alliant pays the $5 fee on your behalf.

In addition to meeting eligibility requirements, you may be required to pay a one-time membership fee (generally up to $25) and open an account with a small deposit (usually below $10).

When you're shopping around for credit union products, you should start with your local credit union, since you'll likely have better chances of meeting membership eligibility requirements compared to a credit union based outside of your local community. If they don't have the financial product you're looking for, you may want to consider other, non-local credit unions that allow anyone to join.

Credit unions may offer some advantages that set their product offerings apart from banks:

• Lower interest rates on credit cards and loans: Credit unions offer some of the lowest interest rates on credit cards and other financial products, saving you a great deal of money if you carry a balance or take out a loan. For example, the Titanium Rewards Visa® Signature Card from Andrews Federal Credit Union offers variable APRs as low as 10.99% and no greater than 17.99%.
• Higher interest rates on deposits: You may receive a higher yield on deposits made to a credit union account, which can add up to earning more money on your savings.
• Lower fees: Credit union products often have the same fees as banks, but they may come at a lower price. And some credit unions may waive certain fees on bank accounts and credit cards.
• Personalized customer service: Since credit unions are typically smaller than banks, they have fewer customers. And since local credit unions were often founded to serve a particular community, they have a reputation for providing more personalized and responsive customer service.

While credit unions have many pros, there are a few cons to consider:

• Membership is required: Credit unions require membership, which may be a hassle if you don't meet eligibility requirements and don't want to pay to become a member.
• Fewer product offerings: You may not have access to as many financial products with a credit union compared to a bank.
• Limited branch locations: Since credit unions are often local to a specific community, there are a limited number of physical locations. This can pose a problem if you want to visit a branch while traveling, or if you're a member who doesn't live near the community. To remedy this, some credit unions partner with others across the country to lessen the burden of out-of-network ATM fees and give you a safe place to make deposits, but it's not exactly the same as opting for a bank that operates globally.
• Less innovative technology: Credit unions are nonprofits, so they may have a smaller budget for new websites or app features, which may result in less advanced technology compared to big banks.

If you're in the market for a new credit card, bank account or loan, you may want to consider the products offered by credit unions. You can shop around online for credit unions both locally and in other communities that you may be eligible to join, or simply call or stop by a local branch to check out the latest offers and see how they stack up to major banks.

Information about the Titanium Rewards Visa® Signature Card from Andrews Federal Credit Union and has been collected independently by Select and has not been reviewed or provided by the issuers of the cards prior to publication.