Most people in the United States are familiar with banks. Banks take deposits, make loans, and offer a wide range of accounts for business and personal banking needs.
Credit unions offer many of the same services, but they work in a different way behind the scenes.
Don’t know which type of financial institution is right for you? Keep reading to learn more about a credit union vs. a bank and the reasons why a credit union might be a good fit for your banking needs.
In most ways, banks and credit unions have more commonalities than differences. While both are capable of helping you reach your financial goals, there are still several differences to be aware of. When comparing, it’s important to focus on the biggest difference first.
The biggest difference between banks and credit unions is that banks are for-profit businesses while credit unions are nonprofit organizations.
The main goal of a bank is to earn a profit. They do that through charging interest on loans, taking a slice of credit and debit card fees paid by businesses, and charging fees for certain bank accounts and activity.
Credit unions need to bring in enough money to pay employees and keep operating, but they are not in the business of earning a profit for their financial services. That means they typically offer more favorable interest rates and lower fees for a credit union member, keeping the customer’s best interest in mind.
Whether you are trying to build your credit with a credit builder loan or you’re looking to grow your savings, credit unions tend to be more personal when it comes to helping you reach your financial goals.
Bank executives report to the bank’s board of directors, which are elected by the bank’s shareholders.
Credit union executives also report to a board of directors, but those directors are elected by the credit union’s members. In most cases, all members will get a ballot so they can vote on who oversees their credit union.
When you sign up for a bank account, you become a customer of the bank. Most banks are happy to offer any combination of accounts you choose, including a checking account, savings account, credit card and other financial products.
When signing up, the bank may review your credit report, credit score, and ChexSystems report to make sure you are not too big of a credit risk. Assuming all checks out well, you can open your account. See our related article about second chance bank accounts.
Credit unions, on the other hand, only offer accounts to members.
Becoming a member typically requires making a deposit in a special savings account. You will have to keep a minimum balance in that account to keep your membership active.
In addition to opening the required savings account, credit unions typically require new members to meet certain requirements, such as:
If you don’t meet those requirements, you may still be able to join after making a donation to an affiliated nonprofit.
Every credit union can set its own membership requirements, so call if you are not sure if you can join and want to ask questions.
Just because banks are trying to make money doesn’t make them bad. There’s a very good reason many people choose a bank for their checking, savings, credit cards, and other accounts.
Banks offer a long list of benefits that credit unions often can’t keep up with. Here are some unique benefits to banks over credit unions that will help meet your financial needs:
Credit unions typically serve a limited area and only have a small number of branches.
That’s similar to some community banks, but larger banks often have dozens, hundreds, or even thousands of branches around the U.S., which also gives you the opportunity to handle banking when away from home.
Just as a big bank may have more branches, they also tend to have more ATMs. The largest banks have thousands of their own ATMs.
Many online banks give customers the option to use affiliated ATM networks without paying an ATM fee.
Banks usually offer a larger variety of accounts of each type. For example, they may offer several checking accounts and savings accounts to choose from to meet your specific financial needs.
Banks often offer more than just traditional banking. They could also offer investment services, for example, so you can manage your stock portfolio and bank accounts with one login.
Some credit unions offer extensive business banking services, but in most cases banks offer more for businesses than credit unions.
Common banking services needed by businesses include:
Banks often have the scale to offer more advanced technologies than a local credit union (or community bank).
That generally leads to the most advanced and user-friendly online banking and mobile banking experiences.
Credit unions are often small but mighty when it comes to taking care of members. Here are some of the biggest benefits of a credit union over a bank:
When you put money into a checking, savings, or CD account at a credit union, you’ll generally earn a higher interest rate than a comparable account at a typical bank.
When borrowing for a mortgage, auto loan, or other loan, you’ll often get a lower interest rate at a credit union compared to larger banks, which can save you money.
Some larger banks are notorious for charging monthly account maintenance fees unless you meet certain deposit, activity, or minimum balance requirements. These higher fees associated with big banks may be a problem when trying to reach your financial goals.
These and other account fees are less common, and lower in general, at credit unions.
Some credit unions belong to a network with other credit unions that allow you to use any branch or ATM in the network with no added costs. If you are joining a credit union, ask about other locations you may be able to use to handle your banking business.
Large banks are happy to offer many types of loans, but most won’t offer personal loans.
If you want a general-purpose loan with no collateral required, a credit union may have better offerings for your needs.
Some banks offer excellent customer service, but the industry isn’t famous for it.
Credit unions, on the other hand, are well-known for being friendly and helpful places to manage your money.
If you are new to credit unions, you might wonder if they are a safe place to keep your money. Credit unions and banks are equally safe when it comes to storing your cash. Both are protected by important government insurance programs that guarantee you get your money back if the bank or credit union goes out of business.
Bank accounts are covered by the Federal Deposit Insurance Corporation (FDIC).
Credit union accounts are protected by the National Credit Union Association (NCUA).
Both offer up to $250,000 in coverage per depositor per bank per account category.
When it comes to financial security for your deposits, both banks and credit unions are very safe.
Banks and credit unions both play an important role in the lives of millions of people around the country.
For those with simpler banking needs that just want a local place with low fees and good customer service, a credit union should do the trick.
If you prefer a more polished online experience and want the ability to manage your money in more ways and more places, a traditional bank is a smart choice.
Whichever you choose, you will likely find a very similar experience. What’s most important is that you choose a financial institution you trust and enjoy working with.
Eric Rosenberg is a former bank manager and corporate finance worker with a Bachelor’s degree and MBA in finance. His work is featured at Business Insider, Credit Karma, The Balance, Investopedia, and many other websites and publications.