Credit Unions vs. Banks – What’s the Difference?

Bank building entrance with many windows and pillarsFinancial institutions exist so that consumers and businesses have a method to manage their finances with various deposit accounts, like checking, savings, and certificates of deposit, and lending, like mortgage, auto, and consumer loans. Banks and credit unions are the most commonly used financial institutions for these different products and services. However, while most financial institutions offer a similar line up of financial tools to their customers, there are several differences between the two of which consumers should be aware. Here’s the breakdown of banks and credit unions, who they benefit, and how they operate in terms of serving the public.

What is a Bank?

The true definition of a bank is any financial institution licensed to receive deposits from individuals and then make loans with those deposited funds. There are banks of all sizes throughout the world, but the majority of these financial institutions focus on providing basic banking products to the masses by pooling funds together. Although most consumers know what a bank is and the products and services it offers, understanding the difference between banks and credit unions is more of a challenge. Consumers need to know that banks are companies, operating solely for the benefit of their shareholders. Often, large national and global banks are run and directed by wealthy board members who want to improve revenue and ultimately, profitability. This means that while banks offer similar financial tools to consumers and businesses, their reasons for doing so are profit-driven instead of customer-driven.

What is a Credit Union?

Unlike a bank, a credit union is a cooperative institution that provides deposit and lending products to the public. Instead of being profit-driven, most credit unions are not-for-profit organizations that are owned wholly by the members they serve. Each credit union member is required to provide a small deposit, typically ranging from one dollar up to five, which represents an individual’s cost of ownership in the credit union. That deposit is kept in the credit union’s coffers, and any revenue generated from providing products and services to its members is passed back to members, not shareholders. Many consumers prefer credit unions because of their member focus, but there are some other differences between the two types of financial institutions that should be recognized when making the choice where to bank.

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Differences in Products

For the most part, banks and credit unions offer similar products and services to customers and members. Individual deposit accounts, like savings, checking, and money market accounts, personal lending, like auto loans and consumer loans, and home lending with fixed and adjustable rate mortgages are widely available across banks and credit unions alike. What is likely to differ between the two types of financial institutions is the cost associated with acquiring these types of conventional banking products.

Because banks are driven by a desire and need to generate profit for shareholders, customers often find higher fees associated with relatively simple accounts. A checking account, for instance, may impose a monthly service fee if a minimum account balance is not maintained, or using a home equity line of credit may incur a withdrawal charge. Credit unions often do not impose these nickel and dime fees on members, because profit is not their singular goal. Similarly, banks may charge slightly higher interest rates on lending products, including home loans, auto loans, and personal loans, while credit unions are able to keep these rates relatively low. It is always beneficial to shop around with various financial institutions no matter the product or type of account you need, but it may be in your best interest to start with a credit union, first.

Benefits and Drawbacks to Customers

Fortunately for consumers, both banks and credit unions are insured. The Federal Deposit Insurance Corporation (FDIC) provides insurance on deposits held in banks, up to $250,000 per individual; the National Credit Union Association’s Share Insurance Fund offers the same coverage for credit union deposits. However, credit unions may fall short in other areas where banks traditionally thrive. For instance, credit unions typically do not have as widespread a presence as large, national banks, and access to branch locations and ATMs may be scarce.

Credit unions also require individuals meet certain membership criteria prior to offering access to its products and services. Some credit unions may be location-based, meaning only people who live in certain cities or counties are eligible for membership. Other credit unions may focus on employees of a certain company or group of employers, while others may offer membership to individuals who went to or are currently enrolled at a specific school. Banks, on the other hand, allow anyone to have access to their products and services.

Overall, most consumers would benefit from working with a member-focused credit union as opposed to a profit-driven bank, but it can be a challenge finding the right fit. Make sure to weigh the pros and cons of working with credit union versus a bank in terms of access to physical locations or ATMs, and the membership requirements that must be met.

Posted on November 3, 2017 by in Personal Finance

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