There are a lot of questions when it comes to personal finance, like where you should invest your money, how to make a budget, or where in the world you should keep your cash.
Banks and credit unions share many characteristics: they have traditional checking and savings accounts, certificates of deposit (CDs), money market accounts, and loan options.
Although they offer many of the same financial products, banks and credit unions have several notable differences. Understanding these differences can help you decide which financial institution to keep your money.
What’s The Difference Between Banks And Credit Unions?
Banks are a business, so they rely on revenue to grow and pay the owners’ dividends. They make their profits off the money their customers deposit and the interest they levy on loans.
On the other hand, credit unions are nonprofit organizations owned by their members. As owners, each member receives a small payout and elects board members to represent their interests in the decision-making process.
Generally, both financial institutions are insured by the federal government for up to $250,000. Banks are covered by the Federal Deposit Insurance Corporation (FDIC), while the National Credit Union Administration (NCUA) protects credit unions.
Banks and credit unions have their advantages and disadvantages, which Penny Hoarder explains.
Credit unions typically have better interest rates on checking and savings accounts, which is one of their most attractive selling points. Since these institutions are owned by their members, they usually provide better benefits like competitive interest rates on their financial products.
Alternatively, banks usually do not offer these perks due to the large overhead cost and for-profit structure. Because of this, credit unions are the better choice when it comes to interest rates.
Credit unions can charge fewer (and lower) fees than banks for the same reasons mentioned above. While most credit unions provide free checking and savings accounts, banks typically impose monthly service fees.
Both financial institutions might have minimum balance requirements, but banks often have more expensive overdraft penalties. These steep fees, plus weak interest rates, are why banks are less likely to benefit your long-term financial growth.
Credit unions also provide more affordable loan rates to their members, including auto loans, home loans, personal loans, and small-business loans.
Not only that, but if your credit could use some work, you’re more likely to receive assistance at a credit union than a bank. When you apply for a loan at a credit union, their officers can work with you to find the best loan program for your needs.
Conversely, banks determine your risk by assessing your credit score and are less likely to approve you if you have bad credit. On the other hand, banks usually offer credit cards, although these typically have expensive interest rates.
Credit unions may seem like the clear winner right now, but they do have their downsides. Rewards are one of the biggest ones.
Although credit unions provide more generous interest rates, fewer fees, and favorable loans, banks usually have attractive rewards for opening a new account or purchasing groceries, which can be a welcome financial boost.
For instance, bank credit cards have a higher chance of cashback or points, while new customers can enjoy a couple of hundred dollars for opening an account. Overall, these are things that most credit unions don’t offer.
National banks have branches throughout the country, while credit unions are usually local or regional. That means if you move frequently, you may have to open a new bank account every time. Not only that, but having more branches means better convenience and better access to fee-free ATMs.
Since credit unions are nonprofit institutions owned by the members (and are usually locally-based), they typically provide better customer service. In fact, a 2019 study from the FIS Performance Against Customer Expectations (PACE) found that people who banked at credit unions consistently noted better satisfaction than bank customers.
PACE found that participants of every age put trust as the most important factor in satisfaction, which signifies that credit unions’ tailored approach contributes to better customer trust and satisfaction.
However, these results were also found in smaller banks, which also provide more personalized customer service than their national counterparts.
Big-name banks often have the resources to make headway in the financial industry, especially when it comes to technology. Over the last ten years, banks have revolutionized online and mobile banking through their websites, apps, and even digital wallets. But, credit unions are slowly gaining and may outpace banks in the future.
- Moore, Timothy. “Credit Union vs. Bank: 8 Key Differences You Should Know About.” The Penny Hoarder, The Penny Hoarder, 5 May 2019, www.thepennyhoarder.com/bank-accounts/credit-union-vs-bank/?aff_sub2=homepage.