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When you are looking for a new checking or savings account, a loan or a line of credit, you have more choices than just the myriad local and national banks that compete for your business. An often-overlooked option for these sorts of products is the credit union, which offers many of the same types of financial products and services that you can get at a bank.
But what exactly is a credit union, and how is it different from a traditional bank? Although both banks and credit unions have similar offerings, there are some important distinctions to make between these two types of institutions.
Understanding the difference between banks and credit unions can help you make the best decisions for you and your family. Here’s what you need to know about how banks compare to credit unions, so you can find the best home for your money.
For-Profit vs. Nonprofit
What makes banks and credit unions different from each other is their profit status. 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 the reason for the difference between the products and services each type of institution offers.
A credit union is owned by its members, since the institution is actually set up as a cooperative. Credit unions typically open membership to individuals who share a common bond, such as the industry they are employed in, the community they live in, their faith or their membership in another organization. In addition, as a nonprofit, credit unions are also generally exempt from federal taxes, and some credit unions even receive subsidies from the organizations that they are affiliated with. This means credit unions do not have to worry about making profits for shareholders.
It is the credit union’s mission to provide its members with the best terms it can afford for their 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.
Banks, on the other hand, are in business to make a profit. This means banks are focused on making that profit, rather than specifically centering on the needs of the account holders. This is one of the reasons why you will often find that banks charge more fees, and at a higher rate, than credit unions do. Interest rates on lending also tend to be higher at banks, while their APYs on savings products tend to be lower.
Why Choose a Bank?
While the fact that credit unions are not-for-profit and member-focused may make them sound like the clear winner compared to banks, there are a number of reasons why consumers may choose banks.
To start, banks are open to any consumer interested in a product or account, provided the consumer doesn’t have a bad banking history. Credit unions are only open to members, and you may not be eligible for membership if you or a member of your household does not belong to the community served by the credit union. This makes banks an easier choice for many consumers who lack any specific affiliation with a community served by a credit union, although some credit unions do allow you to become a member simply by paying a nominal membership fee.
Banks generally have more branches and ATMs available, as compared to credit unions. This added convenience makes it easier to access your money from a bank, since you may be able to find branches and ATMs throughout your city, state and even nationwide. That said, credit unions often partner with other co-ops to provide additional branch availability and access to fee-free ATMs nationwide.
Banks usually surpass credit unions when it comes to financial technology. As for-profit institutions, banks have the money to invest in things like mobile banking apps, which have become ever more important in a 24/7 world. While many credit unions have worked to step up their game when it comes to services like mobile check deposit and banking apps, they don’t tend to operate at the leading edge of technology, as many banks do.
Finally, while both banks and credit unions offer many of the same kinds of products, banks are likely to offer a much wider array of options. For instance, not all credit unions offer commercial loans, even though such loans are a standard part of bank offerings. Credit cards offered through banks also are likely to provide more and bigger perks to cardholders when compared to credit union cards, which tend to be a bit more bare-bones.
Why Choose a Credit Union?
As a cooperative financial institution, a credit union puts its members first. This means credit unions are known for their excellent customer service. When a member goes into a credit union branch, they can generally expect to get personal attention and a commitment to getting their needs met. In addition, your membership to a credit union is good for life, even if you leave the organization or community served by the credit union.
Credit unions also provide their members with necessary financial education as part of their services. In addition to the types of online articles and tools that you can find on many banking websites, many credit unions also offer in-person seminars on important financial topics, such as managing credit cards, preventing identity theft, buying a home, planning for retirement or estate planning.
The biggest benefit to credit unions is financial. A Credit Union National Association (CUNA) report found that the average annual financial benefit for a single credit union member in 2018 was $85. For households, that benefit was $178.
So how does the average credit union member see such benefits? To start, any profits that the credit union sees will be distributed to its members in one of two ways: either by earning interest on their deposit accounts or by receiving dividend checks periodically.
In addition, the fact that credit unions are not-for-profit also means that they often have no minimum balance requirements, lower deposit requirements to open accounts and lower overdraft, non-sufficient fund and ATM fees. Finally, you are likely to receive lower interest rates on loans from a credit union, compared to a bank.
FDIC vs. NCUA
A common concern about credit unions is that they are not insured by the Federal Deposit Insurance Corporation, or FDIC. However, even though credit unions are not subject to FDIC insurance, Congress created the National Credit Union Administration (NCUA) in 1970 to insure deposits in credit union accounts.
The FDIC is a government agency that provides deposit insurance for up to $250,000 per depositor, per insured bank, for each account ownership category. If your bank were to fail or run out of money, the FDIC will pay account holders the money they are due from the accounts in the failed bank. FDIC insurance has been around since 1933 to prevent the kind of bank runs and panic that occurred when banks failed in the 1920s and early 1930s.
Before 1970 and the creation of the NCUA, credit union members had no such insurance should their financial institution fold suddenly. Like FDIC insurance, NCUA insurance guarantees up to $250,000 per share owner, per insured credit union, for each account ownership category, should the credit union close or go into conservatorship.
All federal credit unions and most state credit unions are insured by the NCUA. At the NCUA website, you can see if your credit union is covered, and NCUA-insured credit unions always prominently display their insurance status on signage in their branches.
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Pros and Cons
Which financial institution will be a better fit for you and your family—a bank or a credit union?
Making the Right Choice for Your Money
While banks and credit unions offer a number of the same products and services, they are not the same. For consumers who need nationwide convenience, easy access to mobile banking and a wide array of different products, a bank may be the better bet. But consumers who need lower rates and fees, higher APYs, a personal touch when it comes to customer service and access to excellent, free financial education may do better with a credit union.