Banks, credit unions and savings associations offer accounts that have a number of similarities, which might lead you to think they are essentially the same thing -- just with different names. For example, your bank might offer an interest-bearing checking account while your credit union might counter with a share draft account. Despite their similarities, there are significant differences between how these two types of accounts function.
Check vs. Draft
When you deposit money into your bank checking account, your money is still your money. You can withdraw those funds on demand, typically by writing a check. When you deposit money into your credit union share draft account, you are actually buying shares in the credit union, with each share being worth $1. The credit union agrees to buy those shares back from you for $1 per share upon demand, typically when you write a draft.
Your deposits in a bank interest-bearing checking account represent a loan to the bank. The bank is a private commercial business, and you are the bank's customer. Your deposits in a credit union share draft account buy shares in the credit union. Credit unions are cooperative savings institutions that are owned and operated by its members. When you buy shares in a credit union, you become a part-owner, or member, of that credit union.
Interest vs. Dividends
Your bank agrees to pay interest on the money you deposit into your interest-bearing checking account. Your credit union pays dividends on the shares in your share draft account. The distinction between bank interest and credit union dividends gets blurred, since the Internal Revenue Service treats credit union dividends on share draft accounts as taxable interest when you file your federal income tax return.
The deposits in your bank interest-bearing checking account are insured by the Federal Deposit Insurance Corporation up to the maximum allowed by law, which is $250,000 in 2013. Your credit union share draft account is federally insured by the National Credit Union Administration for the same amount. Both types of accounts can typically be accessed through writing a check or draft, through automatic teller machines or through branded bank debit cards. While anyone of legal age can open an account at a bank, only members can open a share draft account at a credit union.
- Consumer Financial Protection Bureau: What Is a Credit Union Share Draft Account? Is it a Checking Account?
- Fordham Law Review: The Legality of Credit Union Share Draft Accounts Under Federal Law
- State of Wisconsin Department of Financial Institutions: Differences Between Banks, Credit Unions and Savings Institutions
- MyCreditUnion.gov. "Share Insurance Toolkit for Consumers." Accessed July 21, 2020.
Mike Parker is a full-time writer, publisher and independent businessman. His background includes a career as an investments broker with such NYSE member firms as Edward Jones & Company, AG Edwards & Sons and Dean Witter. He helped launch DiscoverCard as one of the company's first merchant sales reps.