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Whether you’re looking for a checking or savings account, loans, credit cards, or other lines of credit, you’ve likely come across both banks and credit unions. While on the surface they seem quite similar, there are some key differences between them that are important to understand.
Before you open up an account at either institution, it’s essential to recognize the pros and cons of both banks and credit unions. Having this information in your wheelhouse can allow you to make the best decision for your financial situation.
Nonprofit vs. For-Profit
A major difference between banks and credit unions is what drives all the other, more minor differences between them: their profit status. Banks are considered for-profit organizations. This means that they are working for a profit and are either privately owned or publicly traded through the stock market.
In contrast, credit unions are non-profit organizations. They are owned by their members, which usually have some kind of connection to each other.
Credit unions are typically connected to an organization, employment industry, religion, geographic area, or other sects that make them exclusive to a particular group of people. With that being said, some credit unions only require that you pay a small membership fee in order to join.
Banks are in the industry to make a profit, and they’re able to use their earnings to offer the latest and greatest when it comes to banking. Credit unions are limited to what they can afford, but they work hard to offer personal support to their community of members.
Why Pick a Bank?
Banks are typically more commonly used than credit unions, mainly because they are available to a wider array of customers. As long as you don’t have a bad banking history, you’re most likely qualified to open an account at a bank. This makes it much easier to open up a checking account or access a loan if you don’t have a connection to a particular community.
Banks also tend to offer many more branches and ATMs than credit unions do. In fact, many banks are available nationwide, granting you access to your funds when you’re traveling. The larger number of locations makes it much easier to get financial services from anywhere you are.
As mentioned previously, banks are for-profit companies. With the money they are making, banks are usually able to attain the top financial technology available. Having extra funds to invest allows banks to roll out impressive mobile banking options, card updates, and other technological advances much quicker than their credit union counterparts.
Finally, the funds available to banks allow most them to offer a wide variety of products. You’ll see this benefit in national bank chains; they can become a one-stop-shop for their customers. They oftentimes will offer checking and savings accounts, home and auto loans, credit cards, and any other financial services you may be looking for.
While it can seem that banks have a huge step above credit unions, don’t count the little guy out just yet.
Why Pick a Credit Union?
While credit unions don’t normally offer the wide range of products that banks can, they tend to make up for that in the area of customer service. Since most credit union members share some connection, there is a personal element in the banking done with these organizations. Credit unions are notorious for putting their members first and offering excellent customer service.
Another great thing about credit unions is that you are a member for life. Whether or not you stay connected with the organization that made you eligible for the membership, you can always keep your account with the credit union. This could offer security to those who may worry that they wouldn’t be welcome if certain parts of their life changed.
Credit unions may offer fewer financial products than banks, but they often provide free financial education to their members. It’s normal to see a credit union offering their members classes on credit cards, buying a home, banking security, or planning for retirement. This can be a wonderful tool for those who are embarking on a journey to take control of their financial situation.
However, the biggest benefit that credit unions have over banks is a financial one. When credit unions make a profit, they give that money back to their members in one of two ways. Customers will either earn their share through interest on their deposit accounts or by receiving dividend checks.
In addition to these benefits, credit unions tend to offer lower interest rates, fees, and balance requirements than banks do. They’re able to do this because they don’t need to make a profit off of their members.
The FDIC and the NCUA
If you’ve stepped foot into a bank branch recently, you’ve likely seen stickers everywhere that advertise the bank being an FDIC member. The Federal Deposit Insurance Corporation (FDIC) is a government agency that insures the money that bank customers invest into their accounts. This insurance covers up to $250,000 per person, per bank.
The insurance offered by the FDIC was a huge benefit that banks had over credit unions for a long time. However, in 1970, Congress developed the National Credit Union Administration (NCUA). This is an organization that provides the same insurance protection to customers of all federal credit unions and a majority of state credit unions.
The development of the NCUA helped create a more even playing field for the security of customers’ investments. The NCUA also makes it incredibly easy to determine if the credit union you’re looking at is insured. You simply can visit their website and do a quick search for insurance status.
Laying Out the Pros and Cons
Here are two tables that lay out the pros and cons for both banks and credit unions.
Banks
Pros |
Cons |
|
Wider access to branch locations and ATMs |
Higher average interest rates on loans |
|
More options for advanced technology, especially in banking apps |
Banks may offer lower Annual Percentage Yields (APYs) |
|
More convenient for a majority of people |
Banks tend to have more and higher fees |
|
Wider variety of financial products are available |
|
|
Insured by the FDIC for up to $250,000 |
Credit Unions
Pros |
Cons |
|
Typically offer lower rates on loans |
Usually have fewer branch locations and ATMs |
|
Often have higher APYs on their savings products |
May be slower to adopt new financial technology |
|
Typically impose lower fees |
Credit unions tend to offer fewer products |
|
Offer fantastic customer service and financial education |
Require that you meet their eligibility requirements |
|
Insured by the NCUA for up to $250,000 |
What About Online Banks?
In recent years, online banks have been gaining more momentum in the financial institution world. These banks move away from the high fees that traditional banks offer, but how different are they from other banks?
The most significant difference between online banks and traditional banks is a simple fact that online banks don’t have brick-and-mortar locations for their customers to visit. This lack of physical locations lets them keep their costs much lower, which is given back to their customers in the form of lower fees or no fees at all.
However, the lack of physical locations can have some understandable drawbacks. It can be harder to deposit or withdraw cash if you have an online bank account. While many online banks work with stores to offer fee-free ATMs, you’re still limited to the bills that the ATM provides. You are also unable to get face-to-face assistance when issues arise, which is something to consider.
Another potential drawback is the limited services online banks offer. Most online banks will only offer a checking and savings account and possibly a credit card. Most of these banks don’t offer other lines of credit, so you would have to search out another banking institution if you’re in the market for something else.
For some people, online banks may be the middle ground between traditional banks and credit unions. Online banks have become a much more viable option in recent years, so it’s essential to consider them as well when you’re looking to open a banking account.
7 Things to Look For in a Bank or Credit Union
Whether you choose a bank or a credit union, there are certain things you need to confirm that the financial institution offers before you open an account there. Here are 7 things to look for.
1. Insurance
While the need for your bank to be insured isn’t likely to arise, it is still essential that you bank with an institution that is insured by the FDIC or the NCUA. The insurance gives you the peace of mind you need so that you won’t lose the money you’ve entrusted to your bank.
In the unlikely event that your financial institution shuts down, this insurance makes sure you get your money (up to $250,000) back, safe and sound. Without the insurance, there are zero guarantees you would get your money back if anything happens to your bank.
2. Access to Your Money
When you are putting your money into a bank account, you need to verify how simple it will be for you to access those funds. Check where your nearest ATMs and bank branches are to see if they are convenient for you. You may also want to look at places you often visit to see if you can easily access your funds while traveling.
In addition to simply pulling cash out, you may want to consider other accessing options as well. Look into what other ways they offer for accessing your money, such as debit cards or checks. You will also want to look and see if they offer mobile banking to let you keep an eye on your money in real-time.
3. Interest Rates
Look into the interest rates for both loans and savings accounts at your potential bank. The higher the rates for savings (APY), the more interest you will accumulate in your savings account. On the other hand, you want low rates for any loans, so you don’t have to pay a large amount of interest on the loan.
4. Range of Products
While you may be only looking for a checking account right now, there is convenience in being able to have all or most of your financials in one place. When choosing a bank or credit union, see what offerings they have in the areas of savings, credit cards, and loans. This will allow you to make the decision with your future in mind as well as your present.
5. Fees
As we mentioned earlier, banks are more likely to charge fees than credit unions, but it’s important to know what fees are charged and how much the fees are. Some banks will charge fees for overdrafts or non-sufficient funds in your account. There may also be fees for not carrying enough money in the account or if you need to replace your debit card. Knowing the fees going in will keep you from getting surprised if you get charged with them.
6. Minimum Balance
Some banks require you to keep a minimum balance in your account. Others may require you to have a certain amount to deposit in order to initially open the account. Make sure to look into this information with the financial institutions you’re considering.
7. Customer Service
While this element doesn’t affect your money directly, customer service can make or break your experience with a bank or credit union. Find out what contact channels there are for the financial institution you’re considering. Banks will be more likely to offer options like a live chat than credit unions, so that is something to consider as well.
Takeaway
When it comes to finding an organization to handle your hard-earned money, it can be stressful to make sure you pick the right one. As with many decisions, picking a bank or a credit union comes down to your personal needs and wants. You want to ensure you are choosing an organization that will offer you the products you need and the services that you desire. While there’s no wrong option, one may fit you better than the other.
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