Nowadays, you have more alternatives to opening new savings or checking accounts than using a traditional bank. Another option most people often-overlook is a credit union that offers similar financial goods and services as a bank.
What makes a credit union different from a bank, you might wonder? Is it better to use a credit union or a bank? While both ensure users can safely deposit or borrow money for various purposes, some distinctions depend on how you want to manage your money.
What are the Differences between a Credit Union and a Bank?
Generally, banks offer a more comprehensive range of retirement, loans, and banking products credit unions lack. Most credit unions fall short of larger banks in terms of access to multiple branches, online and mobile banking technology, and ATMs.
Credit Unions offer high savings rate and minimal interest rates on loans better than most banks. Also, larger banks may subject you to poor and inflexible customer service, whereas Credit Unions often prioritize excellent customer service.
Let’s get down to the significant factors that distinguish banks from Credit Unions, their benefits and demerits, and their suitability for specific purposes.
Ownership and Membership
Banks operate mainly to make a profit and are owned by investors. Anyone, including individuals and businesses, is eligible to own a bank. Banks are required to make a profit for their shareholders.
In contrast, Credit Unions work as not-for-profit organizations owned by their members. The customer base is restricted to a “field of membership.” This can include membership in an organization, a geographic area, a place of worship or school, or a company where people work.
Credit Unions are not mandated to take profit-making as their topmost priority, but to cater for the financial good of their members. Unlike banks, they focus more on keeping fees low, establishing high interest rate accounts on savings and low-interest rates on loans.
Unlike a Credit Union, often customers have no vote or voice in how a bank is governed. In plain terms, you are a customer at a bank but a member in Credit Union.
Banks provide both business and personal banking services, including business loans and credit cards. Banks offer savings and investment vehicles such as money marketing accounts, certificates of deposits, and Individual Retirement Accounts (IRAs).
Credit Unions, particularly in the commercial banking sector, provide fewer products than banks. Investment options are limited with credit unions, which typically offer savings and checking accounts, as well as credit cards.
Although online banks may offer lower rates than brick-and-mortar institutions with an online presence, banks often cannot compete on interest rates with Credit Unions. It’s always a good idea to check both credit unions and local banks for better rates for a loan of any kind.
Credit Unions, in many situations offer the lowest interest rates on loans such as mortgages and auto loans.
Banks have higher fees than Credit Unions because they must make money for their stockholders. Banks’ free checking accounts frequently come with conditions, such as minimum account balances or account service restrictions (like credit cards or mortgages).
Fees for banking errors like overdrafts and failed checks are also higher — especially if you don’t qualify for a premium account. It’s crucial to compare online and brick-and-mortar companies when looking at banking fees.
Checking accounts provided by most Credit Unions comes with no minimum balance and no monthly service charges. And depending on the Credit Union, the fees for banking errors, such as a bounced check, may be lower than a bank as well.
Online Services and Technology
Many big banks have large budgets to cover technology expenses, making it possible for them to launch technical services considerably faster than their counterpart. Banks are also known to have significantly more advanced mobile banking services, which most Credit Unions don’t provide.
Even though local Credit Unions lack the budget to facilitate certain technical services, it’s uncommon to see national Credit Unions with digital banking choices. Endeavor to inquire about the Credit Unions’ mobile banking technology and review their websites for offerings and ease of use.
If technology and online banking are must-have for you, consider this and develop a list of the services that are important to you. Also, always request a user experience demonstration before creating an account with a bank or Credit Union.
Government-backed banks insure funds by using the Federal Deposit Insurance Corporation (FDIC) ‘s protection. Likewise, most federal and local Credit Unions protect your money by insuring it with The National Credit Union Share Insurance Fund (NCUSIF).
Security of your funds on both the FDIC and the NCUSIF coverage protection is up to $250,000 per customer in either a bank or Credit Union. A strategy to insure more than this covered amount of $250,000 would be to divide your funds across various institutions or registered accounts.
Insuring more than $250,000 in one spot is also possible if the funds are spread over multiple accounts with various ownership types. A great example is dividing your funds into your checking account and retirement account in the same financial institution as they are counted separately.
If a financial institution fails, there’s still a chance of you recovering some or all of your funds back. Money that has been lost could be refunded. In most circumstances, a transfer of your account might be made to a new institution, and the available funds and account number will remain the same.
Overall, you can assume that both banks and Credit Unions can safeguard your funds as long as they are insured.
Choosing A Bank: Merits and Demerits
● More products offered
● Likely more branches and ATM
● Financial technology
● Accounts are FDIC-insured up to $250,000
● Higher fees
● May offer lower APYs on savings vehicles
● Higher interest rates on loans
Opting for a Credit Union: Merits and Demerits
● May offer lower interest rates on loans
● Higher APYs on savings vehicles
● Fewer and lower fees
● Excellent financial education and customer service
● Accounts are NCUA-insured up to $250,000
● May have fewer branches and ATMs
● Less access to financial technology
● Fewer products offered
● Eligibility requirements to become a member
Making your choice
Make a list of your priorities. Note the customer service and account functions that are most important to you.
Create a list of your specifications and compare them to those offered by several online, local, and national banks and Credit Unions to locate the one that provides the features and services you desire. Focusing on your most crucial criterion can help you reduce the number of possibilities on your list.
It would help if you also considered other things like:
Are there other institutions on your list that can cater to future needs (for example, having many ATMs)? Are there any drawbacks (fewer branches, more fees) that influence your decision? Once you’ve found the institution that matches your needs, you’ve gotten your answer.
Wrapping Things Up
You now have a better understanding of the differences between a bank and a credit union. In order to respond to the debates about whether it is preferable to store money in a bank or a credit union, I can say that this all boils down to your personal preference and choice at the end of the day.
When deciding what to do with your money, you must first determine what is most important to you. Want a bank that has hundreds, even thousands, of locations around the country? If you travel frequently and need to stop at a bank regularly while on the road, you should consider such a bank.
People who desire a “smaller, more intimate” banking experience will do better with a credit union. They will also save money. Several people prefer the individualized care they receive from their credit union to the close, impersonal treatment they would receive from a giant bank.
When opening a saving account, you would better choose a credit union than a bank because of the greater interest rate. However, some people balance the two choices by keeping their funds in a credit union while keeping their checking account in a typical bank.
Finally, each individual and family is unique, as are their financial requirements. The competition between credit unions and banks is one with no obvious winner. Everything depends on your needs — that’s the major determinant when it comes to who takes your money.