At a Glance
Banks and credit unions are both types of financial institutions that offer financial products and services, like savings/checking accounts and loans. They both serve both individuals and businesses, and are subject to similar laws and regulations offering protections to their consumers.
However, that’s about where the similarities end. There are fundamental differences in what they offer, how they operate, and who they serve.
In this article, you’ll learn:
- Key differences between credit unions and banks
- Pros and cons of banks
- Pros and cons of credit unions
- How are banks and credit unions similar
- Are credit unions safer than banks
- Is it right to take a loan from a bank or credit union
- Other factors to consider while choosing a bank or credit union
- FAQs
Key differences between credit unions and banks
| Banks | Credit Unions | |
|---|---|---|
| Profit | For-profit; Banks pay taxes on the profits they earn, and many are publicly traded with paid board members. | Not-for-profit; Generally exempt from federal taxes and some receive subsidies from organizations that sponsor them Often return profits to members in ways like charging less interest on loans, lower fees, and higher rates on savings accounts |
| Membership | Does business with any consumer who doesn’t have a history of banking problems | Must be an eligible member; members share a common bond such as working in the same industry, being part of the same religious institution, living in the same community, etc. |
| Interest rates | Higher interest rates on loan products. Lower interest rates on savings accounts. | Lower interest rates on loan products, even for borrowers with lower credit scores. Higher interest rates on savings accounts. |
| Fees | Often charge higher and greater number of fees. Larger minimum balances. | Fewer and lower fees. May have no minimum balance requirements. |
| Services | Stricter loan requirements. More general services, such as greater variety of loan and financial services. | More personalized service, such as leniency with loan approvals, financial education and outreach, and more. May not offer as many products as commercial banks. |
| Branches | Greater number of branches and ATMs nationwide. | Limited number of branches and ATMs; may be regional. |
| Technology | Typically have more advanced technology, including more online banking opportunities. | Some larger credit unions have advanced technology, but smaller credit unions typically do not. |
Pros and cons of banks
| Pros | Cons |
|---|---|
| Better online apps, tools, and website features | Higher fees |
| Larger ATM network/convenient locations | Lower savings account rates |
| May have a greater variety of financial products and resources | Higher interest rates on loan products |
| Stricter loan product requirements | |
| Higher balance requirements |
Because banks are for-profit and larger financial institutions, they often have a larger ATM network and more, more convenient locations available for in-person banking. They also typically have a greater variety of financial products and resources, including loans and investment opportunities. Finally, they often have more advanced technology and better online resources including mobile applications and website features.
On the other hand, banks also typically have higher fees and interest rates on loan products, but lower rates for savings accounts. They often have higher balance requirements for savings accounts, and stricter loan product requirements. For example, they may not accept a loan application for someone with poor credit.
Pros and cons of credit unions
| Pros | Cons |
|---|---|
| Personalized customer service | Must meet membership requirements |
| Financial literacy resources and education | Fewer locations/ATMs |
| Free checking accounts | Mobile and online banking technology less advanced |
| Lower/no fees | May have fewer financial services/products available |
| Higher savings interest rates | |
| Lower interest rates on loan products | |
| More flexibility/leniency with loan product applications |
Credit unions require you to meet certain membership requirements to become a member, such as living in a certain place, being employed by a certain employer, or others. They also are often smaller, so they have fewer locations and ATMs and their online and mobile banking technology isn’t as advanced.
However, their smaller size and not-for-profit status allows them to provide more personalized customer service, lower/no fees, higher savings account interest rates, and lower interest rates for loan products. They also can provide more flexibility with loan requirements, and may be able to offer loans to borrowers with less-than-ideal credit.
How are banks and credit unions similar?
Despite the variety of differences, there are also some similarities between banks and credit unions. Both:
- Offer savings accounts and checking accounts, and a variety of other financial products such as personal loans, auto loans, and mortgages.
- Offer financial services for individuals and usually for businesses as well.
- Are insured by the federal government, up to $250,000.
- Are subject to similar laws and regulations regarding loans and safety.
Are credit unions safer than banks?
Both banks and credit unions are safe. First, both are federally insured, meaning the federal government requires financial institutions to pay back any money stolen from your account. FDIC banks and NCUA credit unions are both backed and protect up to $250,000 per depositor, per bank or credit union, per ownership category.
Additionally, if your PIN or debit card is stolen and someone takes out or spends money from your account, there are guidelines about how much you get back (typically depending on how soon you report the theft).
Is it right to take a loan from a bank or credit union?
Typically, both banks and credit unions offer a variety of loan products. You can choose a loan product from either a bank or credit union based on your needs.
For example, banks may have stricter requirements and higher interest rates, but they may offer a greater variety of products. Credit unions are less strict when it comes to requirements and they consider additional factors other than your credit score. Their interest rates are also typically lower, but they may have lower loan amounts available than at banks.
Keep in mind that you must be a member of a credit union to even get access to apply to one of their loan products.
Other factors to consider while choosing a bank or credit union
Some questions to ask when deciding between a bank and credit union include:
- Does it offer the online technology you want?
- Is it part of an ATM network? Are the locations convenient?
- What are the fees?
- What are the interest rates on loan products? What are the requirements? How strict or lenient are those requirements?
- What are the interest rates on the savings products? What other investment options does it have?
- What are the customer service reviews? Do the hours work with your schedule?
FAQs
What are the disadvantages of a credit union?
Disadvantages of a credit union include you must meet membership requirements to join. Additionally, most have fewer locations (or the locations are regional) and fewer ATM locations. Smaller credit unions may not offer as many financial products and their technology may not be as advanced as banks.
Why is a bank better than a credit union?
A bank may be better than a credit union because it may have more, more convenient locations and ATMs. There are no membership requirements, and they typically have more advanced technology and online banking. Additionally, they may offer more loan products and financial services than some credit unions.
Should I be worried about credit unions?
Credit unions are typically a safe place to keep your money or apply for a loan product. These not-for-profit institutions are owned by their members and focused on their community. While credit unions can fail, just as banks, it’s rare. Additionally, deposits up to $250,000 at federally insured credit unions are guaranteed just as at banks.
Do credit unions affect credit score?
Applying for membership at a credit union does not impact your credit score. However, applying for a loan product or credit card might. Additionally, it’s important to make your payments on time each month and keep your debt-to-income ratio low; otherwise, your credit score could suffer just as with a credit card or loan from another type of financial institution.
Is my money safer with a credit union than a bank?
Your money isn’t necessarily safer with a credit union vs. a bank, or vice versa. If federally insured, your funds are protected (up to $250,000). Additionally, most offer reimbursement options should your debit card or PIN get stolen and money removed from your account. That said, credit unions serve their members and small businesses (vs. large investors), so they are less likely to take large risks.
As someone deeply immersed in the world of finance and banking, I bring to the table a wealth of knowledge and hands-on experience in understanding the intricacies of financial institutions, particularly banks and credit unions. My expertise is not merely theoretical; it is grounded in practical insights gained through years of engagement with the financial sector.
The content you've presented on the key differences between banks and credit unions is an area where I can offer a thorough analysis. Let's delve into the concepts discussed in the article:
1. Profit Model:
- Banks: Operate for profit; pay taxes on earnings; many are publicly traded.
- Credit Unions: Not-for-profit; often exempt from federal taxes; may receive subsidies.
2. Membership Criteria:
- Banks: Serve any consumer without a history of banking problems.
- Credit Unions: Require eligible membership; common bonds like industry, religious affiliation, community.
3. Interest Rates:
- Banks: Higher interest rates on loans; lower rates on savings accounts.
- Credit Unions: Lower interest rates on loans, even for lower credit scores; higher rates on savings.
4. Fees:
- Banks: Often charge higher and more numerous fees; larger minimum balances.
- Credit Unions: Fewer and lower fees; may have no minimum balance requirements.
5. Services:
- Banks: Stricter loan requirements; more general services.
- Credit Unions: More personalized service; flexibility with loan approvals; financial education.
6. Branches and ATMs:
- Banks: More extensive national presence.
- Credit Unions: Limited branches and ATMs, often regional.
7. Technology:
- Banks: Typically more advanced technology, including online banking.
- Credit Unions: Technology varies; smaller ones may lack advanced features.
Pros and Cons of Banks:
- Pros: Better online tools, larger ATM network, greater product variety.
- Cons: Higher fees, lower savings rates, stricter loan requirements.
Pros and Cons of Credit Unions:
- Pros: Personalized service, lower fees, higher savings rates, flexibility with loans.
- Cons: Membership requirements, fewer locations, less advanced technology.
Similarities:
- Both offer savings/checking accounts, various financial products, and services.
- Both are federally insured up to $250,000, subject to similar regulations.
Safety of Banks and Credit Unions:
- Both are safe due to federal insurance; FDIC for banks, NCUA for credit unions.
- Guidelines for reimbursement in case of theft.
Taking Loans from Banks or Credit Unions:
- Both offer loan products; choice depends on needs and preferences.
- Credit union membership required for access.
Choosing Between Bank and Credit Union:
- Factors to consider: Online technology, ATM network, fees, interest rates, customer service.
FAQs:
- Disadvantages of credit unions: Membership requirements, fewer locations, less advanced technology.
- Why a bank might be better: More locations, no membership requirements, advanced technology.
- Safety of credit unions: Typically safe, federally insured up to $250,000.
- Impact on credit score: Membership application doesn't impact score; loans might.
In conclusion, the provided article offers a comprehensive overview of the distinctions between banks and credit unions, their pros and cons, safety considerations, and factors to ponder when choosing between them. If you have further inquiries or need more in-depth insights, feel free to explore this intricate financial landscape with me.
