What’s the Difference Between a Credit Union and a Bank – (and Where Should I Keep My Money)?
Credit unions or banks? It’s not a case of “you say po-tay-to, I say po-tah-to.” They are not the same things just with different names. But what are those differences? Both credit unions and banks offer many of the same services and products, but their structures and purposes are vastly different. And those variations may make a difference when you are considering which financial institution would best suit your needs.
One of the ways banks differ greatly from credit unions is in their purpose. Essentially, banks are in business to make money. When you open a checking or savings account at a bank and make a deposit, you, for all intents and purposes, are asking the bank to hold your money for you with the hope of generating income by earning interest on it. The bank then uses your money to create profits by investing it or loaning it to others. In return, the bank pays you interest for the use of your money.
Banks spend more to stay competitive. They advertise their services to generate customers and lobby government so that regulations don’t jeopardize their profits. They spend money to assess risk, to ensure that their loans and investments strike a balance between taking risk and generating revenues.
In addition, banks are chartered by a state or federal government and serve corporations and individuals. They are overseen by a paid Board of Directors and generally offer a wider variety of services and products and greater convenience because they usually have several branches. Bank deposits are insured by the Federal Deposit Insurance Corp. (FDIC) up to $250,000.
In contrast to banks, credit unions are not-for-profit financial institutions. But do not confuse not-for-profit with nonprofit. Nonprofit organizations rely on donations while a not-for-profit organization, like a credit union, generates a profit but uses it to offer lower interest rates to its members. That brings us to another difference: a credit union belongs to its members, and the membership is a distinct group of people as stipulated by the credit union’s charter. Banks generally accept deposits from anyone, while you have to be a member of the credit union to participate. Joining a credit union is not as stringent as joining a fraternity. No one will black-ball you; many credit unions serve several different groups of people and are often open to family members affiliated with those groups.
In effect, the members of the credit union own it. That is why accounts at credit unions are referred to as “shares” because members own a share in the credit union. The members also vote for the credit union’s board of directors, and the directors serve on a voluntary basis. Credit unions have no outside investors so they are not beholden to anyone but the membership. Because there are no outside stockholders, any profits generated do not have to be distributed as dividends to them. This frees the credit union to use those profits to offer lower interests rates on loans and higher dividends to members.
Credit unions are “more grass roots”; they are composed of members from your community and are more localized. They often don’t have other branches and scores of ATM machines spread far and wide like banks, but some have partnerships and affiliations with other credit unions.
Like banks, deposits to a credit union are also federally insured up to $250,000 but not by the FDIC. They are insured by the National Credit Union Administration. (NCUA).
So Which Should You Choose?
Below are some points to consider when choosing where to deposit your money or take out a loan.
Rates & Fees
On average, credit unions offer higher interest rates on deposits and lower interest rates on loans as well as on fees like overdrafts.
Credit unions serve a specific group of people; therefore, its scope is relatively small and local, while banks, especially larger banks, may have many branches across many states. However, many of the credit unions have banded together to share services to address customer’s needs.
Because banks have to be competitive to attract customers, usually they are the first to innovate with new technology. Also, they have more cash to invest in new services like online banking, where a credit union generally prefers to plow that extra cash back into the credit union members’ accounts.
If you travel abroad, it may be a bit more difficult to access your money from a credit union, while many of the largest banks have free ATMs abroad.
With a large bank, you may just be an account number, but with a credit union, you may actually be remembered by name by your teller. If the personal touch is important to you, a credit union may be the better choice for you.
In conclusion, only you know what you need in a financial institution. But no one said you had to choose. If you fit the criteria to join a credit union, it may behoove you to have accounts at both a bank and credit union.