Last week, YoBucko got the same question from two readers: what is the difference between a bank and a credit union? In this article, we’ll provide a simple explanation to help you understand the main differences between banks and credit unions and give you some things to consider before making the switch.
What is a Credit Union?
Credit unions are nonprofit financial institutions that offer financial products and services like checking and savings accounts, loans, ATMs, credit cards, and insurance (in some cases). The major difference between banks and credit unions is their ownership structure. Banks are owned by shareholders; credit unions are owned and controlled by members. To become a member of a credit union, you must be part of the community the credit union serves. For example, I have accounts at USAA because my father served in the Marine Corp. If you are a service member or have a parent, grandparent or spouse in the armed forces, you may be able to open an account at USAA as well. Similarly, my father is a pilot at American Airlines. When I was younger, I had accounts at American Airlines’ Credit Union. Why? Well, they offered better rates on savings accounts than most of the bigger banks.
Benefits of Joining Credit Unions
Credit unions offer members a lot of benefits, including:
- Fees – Credit unions often don’t charge as many fees as larger banks. Today, this is a big concern to many customers as they start seeing monthly fees for online banking, monthly maintenance fees, etc. Some credit unions will even pay your out-of-network ATM fees you pay at other banks. Call your credit union or go online to see how much they will charge you for their services.
- Customer Service -While customer service isn’t always better at credit unions, they are typically smaller organizations that are more focused on serving their members. So rather than getting calls and mail trying to sell you financial products you don’t need, you may be pleasantly surprised to learn that the customer service team is more concerned with keeping your current business. This is also a benefit many customers experience when moving from a large national bank to a community bank.
- Deposit and Loan Interest Rates – An often cited benefit of joining a credit union is that they offer lower rates on loans, higher rates on savings and fewer fees. Why? It goes back to the profit incentive. Banks are required to work in the best interest of shareholders and investors (i.e. profits). Credit Unions, on the other hand, are focused on serving the best interest of members. So rather than paying low-interest and charging higher rates of loans (which creates more profits for shareholders), credit unions charge fewer fees, pay better interest on deposits and offer lower rates on loans (which benefits members).
Drawbacks of Joining Credit Unions
Credit unions aren’t for everyone. Here are some of the potential drawbacks of joining a credit union:
- Eligibility – Credit unions, by law, are required to limit their membership in some way. Some only allow certain people who share an affiliation such as being employees of a company, members of an organization or citizens of a particular city. Make sure to check to see if you are eligible before investing too much time in making the change.
- Size – Credit unions are often limited in size and geographic footprint which may make it more difficult to access your funds anytime. They typically have smaller ATM and branch networks which could be a pain if you travel frequently or don’t live near a branch.
- Product Selection – Because credit unions are often smaller than banks, they don’t always offer as many products and services as a national bank. For many, this is a benefit, but for some people, this is a deal killer. Make sure to learn what products and services are offered to make sure they suit your preferences.
- Technology – While credit unions are beginning to invest money in technology, not all credit unions have the sophistication or capability to offer a high-tech experience. So if online and mobile banking are top features on your list of things you like, you may not be as happy with your switch. Most credit unions will offer online demos to showcase their capabilities, so call the credit union you are considering to see if you can get a virtual tour before opening an account.
The Bottom Line
Banks and credit unions offer the same basic products and services, but they have many differences. Banks are owned by shareholders and have a responsibility to earn profits for investors. Credit unions, on the other hand, are set up to serve the interests of their members by charging lower loan rates, paying higher rates on deposits and keeping their customers happy. Currently, I have accounts at both. I keep my checking accounts in banks because they give me more tools to manage and track my spending and offer easier access to my money across the world. But the majority of my cash savings sits in credit unions where I get great customer service, no fees and higher rates on my savings.