Pitting credit unions versus banks in a side-by-side comparison can be a little like spotting identical twins at the mall.
From afar, if they’re wearing the same outfits, it can be really difficult to tell twins apart. But if you’re around them for some time, you start to notice differences in their personalities.
It’s the same for credit unions and banks: They can be tough to tell apart if you’ve never used a credit union.
Credit unions and banks offer the same services. But banks are built for profit. They have an obligation to their investors to provide a return. Credit union customers are actually members and part owners of the institution: The members get their banking needs met by a not-for-profit organization built to serve its customers.
In this article, we’ll help you understand the differences (and similarities) between banks and credit unions so you can figure out which one is right for you.
Table of Contents
Credit Unions vs. Banks: What Are the Differences?
Structural Differences
1. Ownership: Traditional banks are for-profit companies and thus have an obligation to make profits from their customers. Credit unions are owned by their customers; they’re not-for-profit organizations with volunteer board members selected by the customer members.
2. Membership: Banks generally will serve any customer, provided that you don’t have a risky banking history. Credit unions require you to become members to use their services. Credit unions used to serve specific populations, but it has become easier to become a member over time.
3. FDIC vs. NCUA: The Federal Deposit Insurance Corporation (FDIC) provides insurance for individual deposit accounts at banks up to $250,000. No matter what happens, at an FDIC-insured bank, your money will be safe up to that amount. The same goes for the National Credit Union Administration (NCUA), which also provides $250,000 of coverage for accounts at credit unions.
4. Customer Service: Banks need depositors so they can use their capital for loans and investments. Dealing with customers is often a not-so-useful byproduct. It’s easy for customers to become faceless numbers. Not all banks have bad customer service, but the business goal of a bank is to profit. The not-for-profit status of credit unions means that they exist to serve their members. They have a reputation for more personalized service.
5. Locations: Banks sometimes have more robust networks of branches and ATMs — especially traditional banks. Online banks don’t have physical locations, while credit unions can have limited locations. Online banks and credit unions generally provide access to free ATM networks but often do so through third-party companies.
Product Differences
1. Interest Rates: Traditional banks often do not provide the most competitive interest rates for savings accounts and loans. Online banks usually offer the best rates for savings accounts. Credit unions also have a reputation for offering better rates than traditional banks. In my personal experience, credit unions offer terrific rates on loans, especially if you have a good credit score.
2. Fees/Requirements: Traditional banks aren’t known to score well in this area either. The best online banks and credit unions tend to charge fewer fees and impose fewer requirements such as minimum deposit amounts on savings accounts.
3. Product Offerings: In general, banks offer a larger variety of choices within product offerings such as loans and credit cards.
4. Online Services/Technology: Banks tend to hold the advantage in this area. As larger, sometimes national corporations, traditional banks tend to offer more advanced software and features on their mobile apps and websites than local credit unions do.
The Benefits of Credit Unions
One of the reasons money expert Clark Howard loves credit unions is that they’re designed to serve their membership. Although some are better than others, there’s a good chance that your local credit union will take good care of you and your banking needs.
Here are some of the positive ways that the culture and design of credit unions manifest themselves.
- Better interest rates on savings compared to traditional banks. Credit unions have a reputation for offering more interest on your savings account funds than traditional banks. However, online banks often offer better interest rates on savings accounts than credit unions.
- Lower interest rates on credit cards and loans. These financial products are typically profit centers for banks. This is where credit unions thrive as not-for-profit entities that serve their member-owners.
- Fewer fees and requirements. In general, compared to traditional banks, credit unions don’t hit you with “gotcha” fees and make it easy for you to open and maintain accounts.
- More personalized customer service. There’s no guarantee you’ll get better service at a credit union than at a bank. But credit unions have a reputation for offering friendlier and more personable service, and it makes sense considering the structure of credit unions vs. for-profit banks.
- More community involvement. Credit unions often are involved with local schools and charities. They may be more apt to give loans to small businesses due to established relationships and being more plugged into the community. Some credit unions even have scholarship programs.
The Benefits of Banks
It’s important to distinguish between traditional and online banks. Traditional banks often can boast about large networks of ATMs and physical locations. Online banks typically charge fewer fees and have fewer requirements to do business with them.
Both types of banks can offer advanced technology and a large variety of products.
- Better technology. Banks typically offer better mobile apps and better websites. The larger the bank, the more resources it probably has to invest in those areas. It can be hard for local credit unions to offer the same features and to compete on user experience.
- More product offerings. If you like choice and customization, you’ll appreciate banks in this regard. Banks often offer more options for checking accounts, credit cards, loans and other products.
- More convenient physical locations. Online banks and credit unions often give customers free access to perfectly acceptable third-party ATM networks. But traditional banks often operate national networks of physical branches (which can be especially helpful if you move or travel) and more robust ATM networks.
Credit Unions vs. Banks: The Right Choice for You
Choosing between a credit union and a bank sometimes depends on whether you’re only looking for a checking and/or savings account or you’re looking for much more.
Online banks are more linear and offer stripped-down services. Typically, you aren’t going to an online bank to get an auto loan, a credit card or a mortgage. Credit unions are more holistic and usually offer excellent rates but a smaller choice of products.
“If you’re just doing an online savings account, you’re likely going to get a higher interest rate on your savings at an online bank than you’re going to get with a credit union,” Clark said. “But a credit union relationship is deeper and wider than that. And so they serve a different overall purpose in somebody’s life.”
Clark is a fan of online banks for checking and savings accounts especially if you’re young and don’t have investible assets. He also loves the personalized service that many credit unions offer, and thinks it’s rarely a good idea to do business with a big traditional bank.
Final Thoughts
Some people have never used a credit union simply because they seem unfamiliar. But credit unions and banks are more similar than different.
If you’ve made it this far, you’ve read about the benefits of both. You probably have an idea about which benefits are more important to you.
You can rarely go wrong with a credit union. However, I think it’s as important to choose the right credit union or bank as it is to decide on credit unions vs. banks.
Make sure that the option you select doesn’t charge you a ton of fees and that it offers competitive interest rates. The bank or credit union you’re considering could be online-only or could have physical branches.
Just make sure you feel comfortable with the ways you’ll be using your bank, whether that’s primarily through an app or website or via a local branch — and don’t forget to evaluate your access to ATMs.
