Banks Vs. Credit Unions: How Are They Different?

Credit unions sure seem similar to banks. They offer the same kinds of products and services, with fees and rates that don't seem all that different. So what is it that differentiates banks from credit unions?

The most important distinction between the two is that banks are for profit institutions and credit unions are non-profit. That means while offering many of the same banking products common to other financial institutions, they approach their relationship with account holders a little differently.

Credit unions are different from banks in that:

  • Account holders are members rather than customers. Credit unions are a form of cooperative so all members are part owner.

  • Members have a voting share in the credit union. They can help choose board members or choose to run for the position themselves.

  • The board is made up exclusively of members who volunteer for the positions. There are no stockholders influencing the credit union's business decisions, just fellow members.

  • Credit unions specifically serve people in the local community, and sometimes focus on providing service to a specific segment of the community like teachers or police officers.

  • Credit unions have all deposits insured for up $250,000 by the National Credit Union Administration. (Banks are insured for the same amount, but by the Federal Deposit Insurance Corporation.)

  • Since credit unions are explicitly non-profit, any profit they make gets returned to members in the form of lower loan rates, higher deposit rates, fewer fees, or supplemental services.

But there are many similarities between credit unions and community banks.

While there are some clear differences in how banks and credit unions work, the bigger differences are found when you look at how big banks (what we typically refer to as "megabanks" on this blog) compare to local banks and credit unions. Here are some of the ways that credit unions and local banks are similar:

The biggest differences exist when comparing banking at a megabank to banking local:

  • Big banks are more likely to provide 24-hour customer service, but you're more likely to be stuck waiting on hold for a while and then find yourself talking to an automated system or someone in a call center.

  • Credit unions and community banks support the local community they're a part of, rather than wrecking the national economy with risky moneymaking moves.

  • Community banks and credit unions are quicker to lend money to local businesses. Local small business loans both help fuel the local economy, and provide business opportunities to your friends and neighbors in the community.

  • While big banks have many ATMs and branches nationwide, credit unions commonly band together to provide shared branches and ATM networks to provide a similar level of convenience. And some community banks and credit unions refund ATM fees no matter whose ATM you use, so there's no penalty for taking advantage of that big bank's ATM up the street.

  • The big banks usually have more and higher fees tied to their accounts and services. With local banks and credit unions, it's easier to find free checking accounts and even accounts that give you monthly rewards.

  • In addition to charging fewer fees, community banks and credit unions usually also offer higher interest rates on their accounts. So you spend less while making more.

Making the best banking choice for you is probably more complicated than deciding between credit unions versus banks. Research all your local banking options and see how they compare based on your personal needs.

If you still have any hesitation on whether you should switch from your big bank to a better local alternative, check out the conversation on Twitter around the #banklocal hashtag.

Tags: Personal Finance