You’re probably already familiar with big banks. Banks tend to be huge institutions that stretch nationwide, if not worldwide. Chances are you already have a bank account, too. But what’s up with big banks’ smaller cousins, credit unions? We often hear about credit unions, but the information about them tends to be hazy. So let’s delve more into the credit union and what makes these two financial institutions different.
What Is a Credit Union?
For starters, credit unions are not-for-profit organizations. They get their funding through their account holders, or members, people like you and me. These account holders, whether checking or savings accounts or something else, are members and partial owners of the credit union. If a credit union does make a profit, that amount is invested back into the organization or paid out to members as dividends. Plus, as a not-for-profit institution, a credit union doesn’t pay state or federal taxes. This allows them to provide better interest rates for their products.
Credit unions offer many of the same products as a bank, such as checking and savings accounts and loans. However, not just anyone can walk into a credit union and open up an account. Often you have to become a member of a credit union. Depending on the specific credit union, you can become a member based on your employer, your family’s previous membership, your geographic area or your membership with another group like a place of worship or school.
Because of this setup, credit unions tend to be more community and consumer centered. This means that their services and offerings are more cooperative. Members work together and the credit union itself cooperates with members to provide and improve services.
With a multitude of different credit unions vying for your interest, SmartAsset’s banking experts came up with a well-rounded list of the top credit unions for 2018.
Credit Union vs. Bank – Difference in Size
The first main difference between credit unions and banks is their size. Banks and their branches are everywhere, stretching nationwide and often worldwide. To the opposite, credit unions usually serve much smaller communities. Then within these small communities, like towns or businesses, consumers must become members of the credit union itself to have access to the union’s services.
Credit Union vs. Bank – Difference in Products & Services
This size difference also reflects in what each institution is able to offer to their customers. Banks can offer a wide range of financial services. This includes checking accounts, savings accounts, business credit cards, business loans and more. While there are credit unions that can offer a solid variety of products, like credit union credit cards, their range tends to be more limited than a bank’s. This is also coupled with the fact that banks are for-profit institutions. Banks make money from their services, while credit unions move money around to benefit their consumers.
Credit unions also often work together to provide more resources for their members. Since credit unions are smaller, they can’t provide hundreds of ATMs or branches. So to combat this, they can share spaces and ATMs with other credit unions, benefiting more than one union. For example, some credit unions share Service Centers and ATMs. On the other hand, banks tend to focus more on competing with each other, offering consumers something bigger and better than the bank next door.
You may have heard about your bank accounts being FDIC (Federal Deposit Insurance Corporation) insured. This means that for deposits up to $250,000, the FDIC can insure your money. Credit unions have the same kind of insurance for your deposits of up to $250,000, although theirs are backed by the National Credit Union Administration (NCUA).
Credit Union vs. Bank – Difference in Structure
In terms of higher up structure, both credit unions and banks have boards of directors. A bank’s board consists of directors decided by current directors and the bank’s stockholders. Since stockholders have partial ownership of the company, they get a say in how it is run. The more stocks someone owns, the more votes they get. A bank’s customers can own stock in the bank, but simply being a customer does not have much decision-making power.
On the other hand, credit unions are owned by their customers who are members of the credit union. So if you become a member of a credit union to open up a checking account, you gain partial ownership of the credit union. You then gain a vote in electing board members. If you so choose, you could also run for a board position as well.
Which One Is Better? – Availability
Of course, banks and credit unions are both going to have their own drawbacks. Which one is better will ultimately come down to you and your financial preferences. But let’s take a look at some of the pros and cons of each.
Since banks work on a for-profit basis, they tend to be much larger institutions. That way, they can offer a wider variety of financial services. So if you want to have all your accounts in one place, a bank may provide the better option. Plus, a bank can usually handle larger accounts and more assets better than a credit union.
Due to their limited income and geographic coverage, credit unions can’t offer financial services to the extent that banks can. They tend to have fewer ATMs available to customers, plus limited online banking offerings. Without the bandwidth, credit unions can’t put as much time or money into perfecting a website and account portals.
Credit unions also will have fewer physical branches. This is more understandable though, since credit unions are meant to serve smaller communities. However, if you find yourself in sudden need of a branch while traveling, you’ll likely be out of luck. The upside to credit unions’ more limited reach though, is a more personalized customer service experience. As a credit union member, along with other customers and employees, you gain access to more personal, community-like banking. Keep in mind that you can also find this kind of service at a smaller bank, too.
Lastly, don’t forget that in order to open an account at a credit union, you have to be a member of the credit union. This is limited to a specific group of people, whether by geographic area, place of work or worship, family ties and other factors. Luckily, though, once you’re a member, you can maintain membership for life even if you leave the group that qualified your membership.
Which One Is Better? – Affordability
When it comes to rates, a credit union can have big banks beat. As a not-for-profit institution, a credit union does not have to pay state or federal taxes. This leaves money free for lower loan rates and higher earning interest rates for credit union members. Credit unions also tend to offer lower fees for things like account maintenance and ATM use. You should still check what fees a credit union might charge though, in comparison to your bank.
|Credit Union vs. Bank|
|Size & Community||Limited to smaller communities like religious organizations or companies||Often nationwide, sometimes worldwide|
|Income Stream|| || |
|Products & Services|| || |
|Physical Availability|| || |
|Structure|| || |
|Affordability||Generally have higher earning interest rates and lower loan interest rates||Generally charge higher account maintenance fees and fees for foreign ATM usage|
|Deposit Insurance||NCUA insured on deposits up to $250,000||FDIC insured on deposits up to $250,000|
While comparing credit unions and banks isn’t exactly apples to oranges, it would be unfair to pick a clear winner. Both kinds of institutions have offerings the other one doesn’t. Plus, we as consumers don’t all want the same thing when it comes to financial services. You might want the customer tailored community of a credit union more while your neighbor values big banks’ up-to-date technology and online offerings.
Tips for Opening a Bank Account
- It isn’t always easy to make a financial decision. From life insurance to credit cards, there’s so many options to choose from! Bank accounts are the same way, but you can certainly find the right one for you. You have to first decide what you really want from a bank account before you start looking. For example, deciding you want the availability of physical branches knocks out online banks from your search.
- Once you’ve zoned in on more specific banks, take a look at their offerings. If you want a full suite of financial products, do they offer more than just simple checking accounts? Do their products come with no fees or high interest rates? Taking a look at specifics will help you make a better decision.
- It can also read reviews on banks and their specific accounts. Check out bank reviews from observers and current or past customers. That way you can see the bank’s performance and their drawbacks as well as advantages.
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