credit unions vs banks

Credit Unions vs Banks: Understand The Differences Between Each

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You’ve probably been in one or both of these scenarios:

  1. You want to open a checking/savings account or use another type of financial product
  2. You want to switch over your accounts to another financial institution.

You have choices when it comes to where you get your banking services. It’s almost certain in your city that you have a choice between banks and credit unions available.

To decide whether to use a bank or credit union for your banking services, you should understand how each of them works, their similarities and differences. Then you can decide which will be the best choice for reaching your financial goals.

What is a Credit Union?

A credit union is very similar to a bank and offers most if not all the services that you can get from a bank. This includes checking accounts with debit cards, savings account, mortgage loans, car loans, credit cards, and even investment accounts.

Credit unions are not-for-profit institutions which means that their shareholders are their members, who are their customers. That means that by principle, credit unions operate to serve the community that their members are a part of. To be a member of a credit union, you must be tied by what’s called a “field of membership” which could include factors like:

  • Location – living, working, worshipping, or attending schools in a certain geographic area
  • Employer – being employed by an employer who sponsors the credit union
  • Faith – being a member of a place of worship
  • Family – have a family member who is part of the credit union
  • Membership – being a part of a certain group such as a school, labor union, a branch of the military

Money that is deposited into a credit union is covered up to $250,000 in the event that it fails. This coverage is provided by the National Credit Union Administration, known as the NCUA.

Advantages of Credit Unions

Credit unions offer prospective members the opportunity to enjoy several advantages. First, the fees tend to be lower when compared to a bank. For example, most credit unions offer a checking account that can be opened without charging a fee if your balance is lower than a specified amount. And if you overdraw on your account, the overdraft fee is generally less than it is on a bank account.

Whether you’re looking for a higher interest rate on your savings account or a lower one on your car loan, credit unions are usually more competitive. So your money will generally grow faster in an account at a credit union.

Another advantage of credit unions is that they tend to offer better, more personal customer service. Since they are more focused on promoting the community they operate in, there’s more flexibility and rules that are less strict. They may be willing to go easier on their underwriting guidelines to help a member get approved for a loan for example.

The available financial literacy resources of a credit union is another key advantage that a credit union has on banks. Their intent to serve their communities usually makes them a good source for financial information. Many offer online resources (blog posts, calculators, and other tools) in addition to workshops on topics like building credit, preventing identity theft, and how to create a budget.

Disadvantages of Credit Unions

With few exceptions, most credit unions have a local presence. That means that you might not meet the eligibility requirements to join certain credit unions.

A local presence also limits the number of branches that a credit union has. Many are part of a credit union ATM network that gives access to ATMs that cover all 50 states which are free of surcharges. However, if you need a physical location for a different service and have moved from the area, you’ll have to rely on other channels for support.

Digital services and technology tend to move slower with credit unions. Mid-size to large banks have more money to spend on these services and can offer them more quickly. So if there are certain digital features and services that you need, you should check and make sure that a credit union offers them.

The financial product offerings of a credit union might not be as robust as a mid-size or large bank. Most offer standard products like checking and savings accounts, home loans, and car loans. Credit cards, business loans, and investment accounts are not offered by many.

What is a Bank?

Banks operate as a for-profit institution. Their investors who are sometimes referred to as shareholders own the bank. The goal of a bank is to make profits for their shareholders.

Community banks are smaller institutions that generally operate locally. Mid-size or regional and large banks may have locations in several states and regions.

Money that’s deposited into a bank is also insured up to $250,000 to protect customers from a failure. This insurance is through the Federal Deposit Insurance Corporation. When searching for banks, make sure they are insured by the FDIC for consideration.

Advantages of a Bank

Banks that are mid-sized or bigger will generally an expansive and greater number of branch locations. For those that you branch services while traveling or move often, that is a benefit.

New technological features that make banking services more accessible on mobile devices, for example, tend to roll out faster for banks. Therefore, digital features that are important to you are more likely to be offered.

While credit unions may offer a better customer service experience, banks are more accessible when you need help. Their support staff is generally available for longer hours during nights and weekends. As a result, banks offer faster resolutions for problems that customers face.

The portfolio of products that are offered at a bank is often more extensive than some credit unions. Small business loans, construction loans, trustee services or more specialized services are among the types of products that a bank will offer over a credit union.

Disadvantages of a Bank

There tends to be more and higher fees for services through a bank. For example, an overdraft fee could cost you $36 at a bank, while a credit union will charge you $25. You may also face more minimum requirements such as keeping a daily balance of at least $100 to avoid a maintenance fee on a checking account at a bank. A comparable checking account from a credit union may not require a minimum balance, alternatively.

Charging more and higher fees is common for banks since their goal is to make a profit for their shareholders. Another way that they do this is by offering lower interest rates on savings accounts, certificates of deposit, and other interest-bearing products.

Receiving personalized service through a bank is also less common. It’s less likely that a bank will approve a loan for a customer who doesn’t meet their underwriting qualifications. The guidelines are more stringent and they may not take factors such as a good payment history from previous bank loans or the number of years as a customer into consideration.

Similarities of Credit Unions and Banks

Once you’ve read this far, you are probably starting to understand the similarities and differences between banks and credit unions. Both are considered financial institutions that help manage money through a variety of products and services. These products and services are very similar to one another and probably include:

  • Checking accounts with debit cards
  • Savings accounts
  • Money market accounts
  • Certificate of deposits
  • Credit cards
  • Mortgage loans
  • Home equity loans
  • Personal loans

Access to ATM networks for withdrawing money is another offering that both of them offer. Other features that credit unions and banks typically offer are mobile banking, direct deposit, and overdraft protection.

Both types of institutions have deposit insurance that protects their customers and members against loss. The insured amount of $250,000 is the same, providing equal coverage. The only difference is who provides the insurance, the FDIC for banks and the NCUA for credit unions.

Differences of Credit Unions and Banks

The difference between a credit union and bank lies in how their business is organized and as a result, what their goal is. Banks operate as a for-profit business and many are publicly traded companies.

Like other publicly traded companies, they have board members and strive to meet stockholder expectations on profitability. The profits are taxable and must be paid based on federal, state, and local laws that govern them.

Credit unions on the other hand typically are exempt from paying federal taxes due to their not-for-profit status. There are even some credit unions who receive subsidies that organizations who sponsor them provide.

The goal of credit unions is to serve their members. The profit and tax savings that they receive help them offer more favorable terms. That includes paying higher interest rates on interest-bearing accounts and less interest on a loan product. There are some credit unions that even pay dividends to their members based on how well they performed.

Board members from a credit union are generally elected and members of the credit union are the ones who vote. These volunteer board members are also part of the community so they are focused more on serving and investing in it. Board members at a bank are paid and elected typically by stockholders so they seek to maximize profits.

The last major difference between the two types of institutions is the membership requirement. Banks can be used by virtually anyone who doesn’t have banking issues in the past. For example, if you went on vacation from Florida to California, you could open up a checking account at any bank.

To join a credit union, you must be eligible to become a member. The eligibility guidelines vary by the credit union and may include sharing a common bond such as living in the same community, working in a certain industry, or being affiliated with a certain religious institution.

Some credit unions have very strict rules on who can join. Then there are others who are more flexible and allow family or even those who are associated (a roommate for example) with a member to be allowed to join. The few national credit unions generally have very open rules allowing anyone to join who pays a membership fee or makes a donation to a certain charity.

Are Credit Unions as Safe as Banks?

Your money is just as safe in a credit union as it is in a bank. The NCUA offers federal insurance that protects you if the credit union closes. Your money will be replaced in these cases for up to $250,000 in depository funds.

Oftentimes that failing credit unions (and banks) will merge with another institution. When this happens your account balances will be transferred to the new institution.

You should note that the protection from both the FDIC and NCUA offers up to $250,000 per depositor and institution. There are ways to spread your money if you have more than that amount to cover all of it. You would need to spread the type of accounts that you have and/or have accounts at different institutions.

One way to spread your depository funds is by going with a Certificate of Deposit Registry Service. You can invest in CDs that are offered by a variety of institutions that are insured.

One thing that you should check to make sure is that if you decide to go with a credit union, avoid those that only have state-chartered private insurance coverage. This protection can be helpful but does not offer as much safety of being NCUA.

Credit Unions vs Banks: Choosing The Right One For You

When deciding whether to go with a credit union or bank, it ultimately depends on what your needs are. If having physical branch locations that are located in a wider geographic area is very important to you, it might make sense to choose a bank.

While some credit unions don’t offer as many bells and whistles when it comes to technology, they still might offer you what you need. For example, most offer mobile checking, transferring money between accounts, and balance alerts.

Ultimately your decision will probably come down to the product or service that you are seeking and where you can get the best terms. Credit unions usually offer lower interest rates on loans and fees on services with higher rates for products like a savings account. Still, you should compare several different institutions to determine which one is more favorable.

Final Word

Credit unions and banks are similar in that they both offer different advantages and disadvantages over one another. They’re both safe places to put your money when the institution is insured by either the FDIC or NCUA. The financial products and services found are often the same type, though the rates, fees, and requirements may differ.

To decide on whether to go with a  credit union or bank, start by working backward. Determine what your financial goals are and how it’s tied to a certain financial product. Decide what you “must-have”, “nice to have”, and “can do without” items are. Then compare them to your shortlist of credit unions and banks to find your answer.

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