Credit Union or Bank: What’s the Difference?

The choice, if you have one, between putting your money in a bank or becoming a member of a credit union can seem tricky. But it doesn’t have to be. As with any decision about your personal finances, it’s important to know which kind of financial institution is best for your specific needs.

Banks and credit unions are both financial institutions offering products and services to help you manage your money. Both are safe repositories with accounts insured up to $250,000—banks are insured by the Federal Deposit Insurance Corp (FDIC), while credit unions are insured by the National Credit Union Administration.

But since they work on different business models, banks and credit unions are not the same. To make an informed decision, you should know the differences.

Investors or Members

A bank is owned by investors and operates as a for-profit institution, meaning a bank must make a profit for those investing in it. Banks primarily make money by investing the money you deposit with them. When you put your money in a bank account, the bank uses those funds to make loans to others at a higher interest rate. The bank pays you a certain amount of interest in exchange for keeping your deposit while also making a profit for itself.

A credit union is a not-for-profit institution owned by its members. According to the Credit Union National Association, 120 million Americans belong to one. Credit unions must limit their customer base to what is called a “field of membership.” This can include a company where people work, a school or place of worship, a geographic area, or a membership in an organization.

Credit unions have no need to make a profit for their members. Instead, a credit union’s goal is to return profits to members by charging low fees, setting interest rates on savings as high as possible, and keeping interest rates on loans as low as possible. They may also pay dividends to members if the credit union has surplus income.

Product Offerings

Banks offer both personal and commercial banking products, including business credit cards and business loans. Banks may offer investment and saving vehicles such as Individual Retirement Accounts (IRAs), certificates of deposit, and money marketing accounts.

Credit unions tend to offer fewer products than banks, especially in the commercial banking arena. Credit unions—which tend to be considerably smaller than banks—also typically offer fewer investment products limited to checking accounts, savings accounts, and credit cards.

Interest Rates

When you’re looking for a loan of any type, it’s always best to check with both your local banks and credit unions. While some online-only banks may offer lower rates than brick-and-mortar institutions (even those with an online presence), credit unions outpace most banks in this arena.

Many credit unions offer checking accounts with no minimum balance and no monthly service charges. Depending on the credit union, the fees charged for banking errors, such as a bounced check, may be lower than a bank’s as well.

Smaller Branch Footprint

Credit unions largely tend to be smaller with fewer branches concentrated in a smaller geographical area than larger commercial banks. Customers who have reason to visit the bank branches in different cities in different parts of the county may find it more difficult to limit themselves to use a smaller, regionally focused, out of the area financial institution. Smaller community banks generally have a footprint much like a credit union. This is becoming less of an issue in today’s broader mobility backed financial marketplace.

What About Those Fees?

Since banks must make money for their investors, they tend to have more and higher fees than credit unions. Free checking accounts at banks usually come with stipulations, including minimum account balances or requirements for additional account types (such as mortgages or credit cards). The fees for errors, such as a bounced check or overdrafts, tend to be higher at banks—especially if you don’t qualify for a premium account.

Again, when you’re researching banking fees, it’s important to compare both online banks with brick-and-mortar firms.

Many credit unions offer checking accounts with no minimum balance and no monthly service charges. Depending on the credit union, the fees for banking errors, such as a bounced check, may be lower than a bank, as well.

Advantages of Credit Unions

Credit unions typically offer lower fees, higher savings rates, and a more hands-on approach to customer service for their members. Since credit unions are smaller and member-owned, the staff may take the time to get to know each individual member, providing more personalized suggestions than you might receive from a bank.

In addition, credit unions may offer lower interest rates on loans. It may be easier to obtain a loan with a credit union than a bank.

Members of credit unions play an active role in the institution. Credit union members get to vote on policies and decisions made by the financial institution.

Disadvantage of Credit Unions

Credit unions are somewhat exclusive. Unless you are eligible to become a member, you can’t simply join and sign up for products and services. While some credit unions are easier to join, others may require that you have a specific job or belong to a specific group.

Most credit unions cannot compete with banks when it comes to convenience (such as access to ATMs and branches) and the technology that allows mobile banking. While credit unions may offer lower interest rates on loans, the array of financial products may be limited in scope compared to big banks.

Next Step

To determine which is better for you, a credit union or bank, consider what you want from a financial institution.

Do you value convenience over personalized service? Do you prefer better rates and fewer fees? Prioritize your needs and decide which option best meets your financial needs.

Know your financial goals. If you need help with determining goals and how to achieve them, see a financial adviser.