Credit Union vs. Bank: What’s the Difference?
Wednesday, Nov 23 2022
When opening a checking or savings account, taking out a loan, or seeking a line of credit, you can choose from many local and national banks competing for your business. An often-overlooked option is a credit union, which offers many of the same financial products and services as a bank.
But what is the difference between a credit union vs. a bank? Banks and credit unions have similar offerings, but their ownership is different, making the rates and terms they offer unique. Understanding the difference between these financial institutions can help you make an informed decision for your financial needs.
What is a Credit Union?
Credit unions are not-for-profit organizations operating on a philosophy of people helping people. Since 2013 credit unions have experienced a steady increase in members. Today, more than 132 million Americans belong to a credit union.
At first glance, credit unions appear like typical banks offering many of the same financial products. Members can access the same products and services a bank provides, such as credit cards, checking and savings accounts, and loans. But a closer look shows how banks and credit unions operate differently.
The most significant difference between banks and credit unions is their profit status. Banks are for-profit institutions, meaning they are privately owned or publicly traded. Credit unions are nonprofit financial institutions owned solely by their members. This for-profit vs. not-for-profit divide impacts each type of institution’s products and services. It also has implications on fees charged and voting decisions.
Credit union members elect a board of directors to manage the institution and ensure their best interests are represented. They charge interest and fees like a bank but reinvest those back into their products, whereas banks give these profits to shareholders. As a nonprofit, credit unions are generally exempt from federal taxes.
Eligibility differs across credit unions. If you don’t meet the requirements, certain credit unions allow you to become a member by joining a participating organization. Affiliated groups typically include labor unions, employers, schools, or places of worship.
Credit unions offer advantages to set them apart, including:
- Low Interest Rates. Credit unions typically offer low interest rates on credit cards and loans to serve their members. These lower rates save members a great deal of money when taking out a loan or mortgage.
- High Returns. Credit unions often have interest rates higher than banks on savings and checking accounts. You may receive a higher yield on deposits made to a credit union account, adding up to earning more money.
- Lower Fees. Credit union products have fees like banks, but their goal is to keep expenses down, so costs are typically lower.
- Better Customer Service. Since credit unions focus on serving a particular community, they have a reputation for providing more personalized and responsive customer service.
How is a Bank Different?
Banks are for-profit institutions owned by investors and obligated to deliver a profit to their shareholders. They provide checking and savings accounts, loan and mortgage services, automobile financing, and other financial services. Banks range from small, community-based institutions to large, nationwide entities.
As a bank customer, you can benefit from:
- More Financial Products and Services. Many banks provide financial advisory and investment account services in addition to core offerings, such as deposit accounts, credit cards, and loans.
- Branches and ATMs Locations. Though much banking now occurs online, a bank will likely have a branch or ATM if you travel and need access to your physical location outside your immediate area.
- FDIC Backing. The FDIC insures banks. It doesn’t insure credit unions. But in 1970, Congress created the National Credit Union Administration (NCUA) to insure deposits in credit union accounts. Like FDIC, NCUA guarantees up to $250,000 per share owner, per insured credit union, for each account ownership category, providing additional accountability.
The Credit Union vs. Bank Difference
Banks and credit unions are institutions that hold cash and give you standard financial services. The main difference between credit unions vs. banks is that investors own banks, and they operate as for-profit institutions. In contrast, credit unions are nonprofit and established to service their members.
Other differences between banks vs. credit unions include:
- Interest Rates. Higher rates on your savings and checking allow your money to grow faster when you save. While lower interest rates on loans make it cheaper to borrow money for items such as a car or house. The National Credit Union Administration shows credit unions typically offer higher interest rates on CDs, money markets, and savings accounts and lower rates on most home and car loans than banks.
- ATM Locations. Broad ATM and branch networks are the norm for national banks. Since credit unions are local, their ATM locations are usually more limited. To combat this, a credit union might belong to large, cooperative networks of ATMs and offer fee-free shared branches.
- Members vs. Customers. At a bank, you are a customer, and anyone is eligible to open an account. While at a credit union, you are a member and part owner of the institution. Members have a vote and say in certain decisions.
- Fees and Minimums. Banks make money for their investors and tend to have higher minimum balance requirements and fees than credit unions. Depending on the credit union, bounced checks and overdraft fees are often lower than at a bank.
- Customer Service. Credit unions are nonprofit and focus more on their members’ needs. And since they are typically smaller and committed to serving members, they tend to provide better customer service. Large national banks often enforce stricter rules and have less flexibility in decision-making.
Making the Right Choice for You
While credit unions and banks offer similar financial products and services, their differences make them unique. If you’re looking for lower rates and fees, a personal touch, and access to free financial education, contact Focus Federal Credit Union.