Do you sometimes wonder what the practical differences are between banks and credit unions? Whether you’re using the right one for the right services?
Banks and credit unions are both traditional financial institutions that arguably have more in common with each other than they have differences, but the things that do set them apart are significant.
This article will cover their similarities, what sets them each apart, and when one is typically better for your needs than the other.
For-Profit vs. Non-Profit
The most fundamental difference is that banks are set up as for-profit financial institutions while credit unions are non-profit. Banks are owned by investors. Credit unions are cooperatives and their customers are referred to as their “members” because the credit union is technically owned by all of them.
Many people feel that credit unions, on average, provide better customer support and that this is due to the fact that credit unions do not have outside investors to account to. Instead, they must account to their members, who are also their customers.
Who Can Join
Another difference is who can get an account or loan at each. Nearly anyone can become a customer at a traditional bank, although those with very poor credit or unpaid balances from other banks might have a difficult time opening a new account or getting a loan. However, credit unions don’t serve the general public like banks do.
To join a credit union, you must fit into the category of their members, and that differs depending upon the credit union. There are credit unions organized specifically around occupations, such as ones for teachers or police officers. There are also credit unions organized geographically, by township or other community, which require all of their members to live or work within certain boundaries.
Before you think that your chances of joining a credit union are nonexistent, know that they typically make it as easy as possible to join. Many extend membership opportunities to the family members of anyone who fits into their category, meaning if your mother is a teacher then you too can join the local teachers’ credit union. Also, some base their membership upon something as simple as belonging to a charitable organization, which can be joined prior to applying for membership at the credit union.
Interest Rates May Differ
Credit unions are known for superior customer service, but when shopping for a loan or a place to build your savings, available interest rates are really important. How, then, do banks and credit unions stack up in this category? Well, credit unions are known to shine in this category as well. That’s because, as a non-profit, the excess income the credit union makes goes right back into the business in the form of higher interest paid on deposits, lower interest charged on loans, and lower fees for its members.
With banks, the excess income goes into the hands of managers and investors, who don’t have a duty to customers to make their products less expensive the way credit unions do. Of course, it’s fully possible for a particular bank to offer better interest rates than a particular credit union. So, broad generalizations aside, it is important to compare rates from both when looking for a loan or long-term savings account.
The last category we’re going to cover is services and products typically available from banks and credit unions. This is the only category where banks take a slight lead. Although for the average customer a credit union will offer almost any financial product they need—including car loans, CD accounts, savings accounts, and more—when it comes to which financial institutions offer the greatest variety, banks have the upper hand.
In part, this is because most banks are larger businesses with more locations. For example, frequent travelers may weigh their options and wisely choose to keep their money in national and international banking institutions that offer national and overseas ATM access, easy currency exchange, and sophisticated investment advice.
And, services such as online bill payment and mobile check deposits are more frequently available to bank customers than credit union members, or might cost less at a bank.
So Which is Better?
There isn’t an easy, one-size-fits-all answer to this question. It will depend upon an individual’s lifestyle, financial needs, and what services are most important to them. Additionally, some banks are much better or worse than others. If you decide to use a bank, make sure to choose one of the best banks. To some, banking at a small, local credit union with better rates and friendly tellers might offer everything they need. For others, especially those used to utilizing lots of technology driven banking services, a traditional bank is clearly the best choice.
Before deciding which is best for yourself, check the websites of several banks and credit unions in your area and see what services are offered and where membership would be available to you. For many who haven’t yet tried credit unions, they might be pleasantly surprised at how many they qualify for membership at and the level of service and products available.