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Does it matter where you keep your money?
You’re probably familiar with personal checking and savings accounts. But banks aren’t your only financial services option. Despite being called “bank” accounts, credit unions provide these services, too (and many others).
But while credit unions provide similar services as banks, they’re not actually the same.
It’s important to understand the similarities and differences between banks and credit unions, so that you can decide which is best for you and your financial needs.
Banks receive deposits and lend money to individuals, small businesses, and large corporations. Banks come in various shapes and sizes, from local community banks to multinational investment banks.
They’re for-profit financial institutions, so the ultimate goal of each bank is to return value to its shareholders.
Chances are, you have a bank account. Nearly 70% of U.S. households have a bank account, according to a 2017 national survey by the FDIC, the Federal Deposit Insurance Corporation. This independent agency backed by the U.S. government insures money deposited into FDIC-insured bank checking accounts, savings accounts, certificates of deposit (CD), money market deposit accounts (MMDA), and more — up to $250,000 per account. This means your money is safe, even if your bank fails.
Credit unions also receive deposits and lend money to individuals and businesses. However, they are financial cooperatives (aka co-ops) made up of members who share a common bond. Credit unions are run by their members, for their members. This creates a natural incentive to provide competitive financial services.
Unlike banks, credit unions are nonprofits with a volunteer board of directors. When you join a credit union, you become a co-owner. As a member and co-owner, you have a say in how the credit union is run, such as electing directors. Membership is growing, too. According to the Credit Union Trends Report, total credit union memberships reached 122.5 million, about 37% of the total U.S. population, at the end of 2019.
Credit unions are members of the National Credit Union Association (NCUA) and insured by the National Credit Union Share Insurance Fund (NCUSIF). Just like the FDIC, the NCUSIF is backed the U.S. government and protects deposits made into federally-insured credit union accounts up to $250,000. The Share Insurance Fund also separately insures protects IRA and KEOGH retirement accounts up to $250,000.
Don’t worry — your money is protected either way. The FDIC and NCUA are federal agencies that are in charge of protecting peoples’ money. Should certain banks or credit unions fail, your deposit funds are insured up to the $250,000 limit.
So, for example, if you have $300,000 in a bank account with an FDIC-insured bank, $250,000 of your total is covered, while $50,000 is not.
Why is this necessary?
Because financial institutions don’t hold your bank account money in a vault like they would a safety deposit box.
The government has reserve requirements. Most financial institutions are only required to hold 10 percent of deposits, while the other 90 percent can be used to issue loans. From a bank’s perspective, loans are assets, since they make money via borrowers’ fees and interest.
Banks have to be conservative lenders. Because if they issue too many bad loans, they’ll be insolvent and fail. To protect against bank failure and to ensure people don’t lose their hard-earned money, the FDIC and NCUA insure deposit accounts.
Most banks and credit unions will be insured, but you can check by using the FDIC’s BankFind search tool or the NCUA’s locator.
Banks and credit unions operate with different objectives, but they share certain features. Aside from the “financial institution” label, many banks and credit unions offer similar products, such as:
But, this isn’t an exhaustive or universal list of services. A community bank isn’t guaranteed to provide the same services as a small credit union or even a regional bank. One might concentrate on mortgages, while another focuses on investment services. Services will vary from bank to bank and credit union to credit union.
As we just covered, banks and credit unions generally offer a lot of the same financial products and services. However, there are several key differences that separate the two. These differences are mainly driven by different business models (i.e. nonprofit vs. for-profit).
Simply put, banks and credit unions are governed with different objectives and goals in mind. Banks have a paid board of directors, while most credit unions have unpaid volunteers serve as board members. Here are a few other key differences.
Credit unions have membership requirements, while banks do not.
Credit union members share some level of commonalities, such as working in a certain industry or living in a specific area. Some credit unions have more stringent requirements than others. For example, to be a member of the Navy Federal Credit Union, you would need to be in the military, a veteran, or have an immediate family member who has a membership.
Conversely, banks are open to working with just about any consumer, so long as they don’t have a history of banking issues.
Outside of community banks, banks tend to be larger in scale and, as a result, have more branches and a larger network of ATMs. This provides an added level of convenience if you don’t have a credit union nearby or you travel often. To counter this, many credit unions participate in shared branching, which is a network of credit unions that will provide shared services and shared ATMs to the members of participating credit unions.
Since banks generate more profit, they’re also more likely to invest in better technology (e.g. mobile banking apps). This leads to higher quality digital platforms with enhanced user experiences.
In addition, banks have the resources and personnel capabilities to be more accessible — such as 24/7 access to customer service representatives.
Although banks are usually more accessible, credit unions are known for providing higher quality customer service. According to a recent Consumer Reports survey of its 72,000 members, 96% of respondents were “highly satisfied” with their credit union, compared to 80% for the three largest banks.
Why are customers more satisfied with credit unions?
First, banks often rely on call centers, which can be based in other countries, leading to possible communication barriers and customer frustrations. Credit unions can usually connect you with a local representative to handle your question or problem.
Second, it’s another direct result of the underlying business model. Banks have more of a transactional relationship with their customers, while credit unions are run by their members for their members.
In most cases, relative to credit unions, banks will charge higher fees, pay consumers lower rates on their deposit account funds, and issue loans with higher interest rates.
Banks are more expensive for several reasons. First, they’re for-profit institutions, so they’re incentivized to make more money. Second, since credit unions are nonprofits, they’re not subject to state and federal income taxes. This allows credit unions to provide cheaper services and better rates.
It only costs about $5 to $25 to join a credit union and become a voting member. Plus, most credit unions don’t have minimum daily balances, while banks often charge you a monthly fee if your accounts are below a certain dollar threshold.
That being said, banks tend to offer more comprehensive credit card rewards programs, so there are trade-offs depending on your preferences.
It depends on the institution, but banks — especially larger ones — are usually able to provide a wider variety of products and services. In general, banks offer more investment services and business banking products, while credit unions tend to focus on consumer-related products and services (like mortgages and refinance loans).
There are a few things you need to consider before you choose which one. Here’s one way to approach this process.
Credit unions have membership requirements, so you’ll want to see if you’re even eligible to join one first. You can use the NCUA’s locator to find nearby credit unions. Credit union membership is based on commonalities, like employer, family members, and geographic area.
Next, figure out how accessible your bank or credit union needs to be. Does in-person banking matter to you? If not, you can focus on digital banks and credit unions with easy-to-use mobile apps. How often do you need to use an ATM? Larger banks will have a much larger network of ATMs at your disposal. Credit unions often serve local communities, so they tend to have fewer locations and smaller networks.
If personalized customer service is your biggest priority, then a credit union might suit you best. If it’s not, a bank might be more appropriate. Your customer service experience will differ, depending on the size of the bank. You might have a broader window of access to regional and national banks’ customer service teams, but you’ll get more personalized service from a community bank.
Figure out what kinds of products and services you’ll need, such as investment services or commercial lending. Then check to see if the credit unions you qualify for offer them. If they don’t, look into national and regional banks, which will have more diverse offerings. Then you can compare rates and fees.
Credit unions offer better rates and lower fees relative to banks on average. But, if cost is a one of your priorities, it’s still important to compare rates and fees against other credit unions to find the most cost-effective option. If you don’t qualify for a credit union, interest rates and fees will vary depending on the service and the bank. Some banks may offer better mortgage rates but lower interest rates for savings accounts or CDs.
According to a recent Consumer Reports survey of its 72,000 members, 96% of respondents were “highly satisfied” with their credit union, compared to 80% for the three largest banks.
Hopefully, after reading this, you’ve come to the conclusion that there are applicable differences between banks and credit unions.
At the end of the day, you’re not restricted to one financial institution and you’re not stuck with your decision. It’s common for people to bank with several institutions to get the best rates.
Whether you decide to go with a big bank or a local credit union, it’s still important to assess several options. Ultimately, the best choice(s) will meet your banking preferences and personal finance needs.
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