Credit Unions vs. Banks: What’s the Difference?

Banks vs. Credit Unions

Whether you’ve moved to a new city or you’re just looking to change to a different financial institution, it’s wise to compare credit unions vs. banks to see what’s the best choice for you. 

There are significant differences between a credit union and a bank you need to know. Read on to learn more about those differences so you can make an informed financial decision. Although both financial institutions do similar things, each offers different benefits for their members.

Let’s get started. 

Key differences

Credit unions are nonprofit financial cooperatives. Any earnings are paid to the credit union members in the form of lower interest rates on loans and higher interest rates on savings accounts. On the other hand, banks are for-profit and only pay earnings to bank stockholders.

Another notable difference between credit unions and banks is that people who open accounts at credit unions are called members, while people with accounts at banks are customers. Credit union members own a portion of the credit union, while bank customers do not own the bank.

Their for-profit statuses are what make banks and credit unions operate differently. Banks are for-profit, meaning they are either privately owned or publicly traded, while credit unions are nonprofit institutions. This for-profit vs. not-for-profit divide is why there is a difference between each type of institution’s products and services.

The credit union’s mission is to provide its members with the best terms it can afford for its financial products. This means members generally get lower rates on loans, pay fewer (and lower) fees and earn higher APYs on savings products than bank customers do.

On the other hand, Banks are in business to make a profit. This means banks are focused on making that profit rather than explicitly centering on the needs of the account holders. This is one of the reasons why you will often find that banks charge more fees at a higher rate than credit unions do. Interest rates on lending tend to be higher at banks, while their APYs on savings products tend to be lower.

Ownership

Credit unions are not-for-profit and owned and governed by their members. Any person who becomes a member can actively participate in the organization’s affairs by direct voting. For example, all members participate in the election of the board of directors.

On the other hand, banks are usually owned by a small group of shareholders. Shareholders participate in the bank’s governance by electing a board of directors, while regular customers cannot participate in the election. Banks must make a profit for their investors, while credit unions do not need to make a profit for their members. 

Eligibility

Anybody with money can open an account at a bank. But with a credit union, you have to qualify for membership—even if you have a bucketload of cash. There are many ways you can become a member based on where you live or work, but chances are you can still join one if you don’t meet the qualifications. You’ll have to pay a fee, though. 

Sometimes, credit unions only offer membership to individuals affiliated with a community served by the credit union in question or a specific local employer such as the Jeep Credit Union. Credit Union membership could be limited to a particular city, county, or region of the state. 

Products

The choice of a bank or a credit union won’t limit the products available to most customers who want to handle personal and small-business finances. The primary offerings at both types of financial institutions are virtually the same.

Most banks and credit unions offer:

But a bank is more likely to offer specialized products, such as student loans or trustee services. A smaller credit union may not be able to accommodate your needs in these areas. Some smaller institutions may partner with service providers to provide these products to their customers.

Banks and credit unions also offer online banking services and mobile apps for account management, although a banking website or app may provide more up-to-date features. But both allow you to view your accounts, make deposits with your mobile device, transfer money between accounts, and pay bills.

Interest rates and fees

Both institutions make money by lending it at higher interest rates than they pay out on deposits. They also make money through fees. Credit unions tend to offer more attractive rates and fees. Credit Unions operating as not-for-profit allows them to carry lower interest rates on loans and focus on maximizing profits for members rather than outside investors. Their not-for-profit status exempts them from the same kinds of taxes that banks must pay.

Credit unions tend to offer higher interest rates on savings accounts and CDs, lower rates on loans, and lower account fees than banks. This allows customers to maximize their returns on deposits and minimize their loan costs. 

Banks offer lower rates on customer deposits and higher rates on loans because of their higher tax burden and their motive of maximizing profits for investors.

Money safety

Your money is generally safe at either type of institution, as long as the institution holds insurance. The safest insurance available comes from the U.S. government.

The Federal Deposit Insurance Corporation or FDIC ensures funds are held at banks with government backing. The National Credit Union Share Insurance Fund NCUSIF  protects you with the full faith and credit of the U.S. government at federal and most state-charted credit unions.

Your money may be insured if an institution goes under, and your lost funds will be replaced. Your account will end up at a different institution in most cases, and you’ll keep the same account number and account balance as before. Both FDIC and NCUSIF coverage protect up to $250,000 per depositor, per institution. 

Online services

Indeed, there may be more locations to serve you with a bank, but both banks and credit unions offer many online banking options. A bank may have a slightly more sophisticated app or website, but they offer similar online banking services. 

So even if you are abroad or travel often and have no credit union branch locations, you will be able to use your credit union’s mobile and online banking tools to access your account, ask vital financial questions, and more. 

Support

There are certain advantages of using a bank that a credit union may not offer. Often, there may be very few, or even only one, branch or location of a credit union in your town. Banks are typically much larger chains, many even on a national level, so there are more locations at your disposal no matter where you are. This offers greater convenience, and the same applies to ATMs when you need to make a quick withdrawal and don’t want to pay a user service fee. 

Larger banks may have 24-hour customer service support, while a smaller local credit union may have limited customer service hours aligned with the bank’s business hours. 

Pros and Cons

Bank

ProsCons
Added Convenience due to more branches and ATMsStricter eligibility requirements
Resourceful online apps, tools, and features
Higher interest rates and transaction fees
A Broader range of products
Extended customer support hours
No membership required

Credit Union

ProsCons
Greater financial literacy resourcesLimited financial product offerings
Deposits are insured in the same way as banksFewer physical branches
Lower interest rates
Must become a member
Less rigid eligibility requirements
More personal service

Are credit unions better than banks?

There is no exact answer to if credit unions are better than banks. That answer depends on what you need in a financial institution and which can best meet those needs. When shopping for a financial institution, your decision should be based on what best meets your personal and family needs. For some people, a credit union may work better. While for others, a traditional bank makes the most sense.

Conclusion

Credit Unions and Banks each have their unique features in how they operate, which allows them to provide services and function in a way the other may not be able to. When deciding which is suitable for you, it is best to assess what you want in your financial institution and sit down to review which will meet your needs. It is hard to say which is better with each operating so differently. It depends on your situation and needs which option is better.

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