Whether you're looking into opening a checking account or want to invest in a certificate of deposit, you have both banks and credit unions as options when you're researching financial institutions. While you can find most common financial products to meet your needs at both types of places, there are several differences when it comes to how these financial institutions are structured, which perks they offer and who qualifies to open an account. Customer service and convenience can also differ. It's helpful to know how credit unions and traditional banks differ and how to decide which financial institution is right for you.
Looking at Traditional Banks
Traditional banks work to serve customers in the community but tend to have several branches regionally or even nationally. They don't require customers to be part of a specific group or occupation and are open to people and businesses who qualify for the banking products available. When you take a look at the offerings at traditional banks, you find a large selection of bank accounts, loans, credit cards and investment products. For example, you can often choose from many credit card options as well as multiple checking and savings account tiers.
These financial institutions operate as for-profit organizations with investors, so they seek to make the best profit on the money that customers have stored there as well as the money customers borrow. Along with needing to keep their investors satisfied with profits, traditional banks have taxes to pay as well, and this impacts customers directly. Customers usually face higher fees for accounts, higher interest rates on cards and loans and lower interest rates for their savings products.
Whenever you deposit money at the bank, you get some federal protection so that you don't need to worry about losing your cash if something happens to the financial institution. This insurance comes from the Federal Deposit Insurance Corporation and has a $250,000 limit for each customer on an account. While this means the cash in your savings or checking account is likely safe, the FDIC protection usually doesn't apply to investment accounts where you've put your deposited money into stocks and bonds.
Exploring Credit Unions
When comparing credit unions to traditional banks, you'll find that a big difference lies in the ownership structure of this type of financial institution. While the primary interest of traditional banks lies in appeasing investors who seek a profit, credit unions don't operate for a profit. Instead of account holders being customers, they're actually members who have part ownership in the credit union, and thus the credit union makes decisions that are designed to serve the community members. Further, when credit unions make money, they reinvest those funds right back in the financial institution.
This structure gives credit unions differences when it comes to the areas served along with account holder requirements. Credit unions tend to focus on gaining members based in a certain region or who are part of a specific organization or group. This means that not just any person can become a member of a credit union. Each institution sets its own requirements for becoming a member. Further, those who join a credit union will likely have fewer branches to visit.
Credit union members can find most of the financial products they need that banks also offer, but there may be less variety when it comes to things like types of credit cards and account tiers. Due to being non-profit institutions, credit unions tend to offer their members better terms – such as lower interest rates on loans and higher dividends (the credit union term for interest earned) on savings. Like bank customers, credit union members get up to $250,000 in protection for their deposits, but it comes from the National Credit Union Administration rather than the FDIC.
Read More: Negotiating Interest Rates With Credit Unions
Benefits of Using Banks
When you choose to use traditional banks, you get more flexibility and options that can seem more appealing than credit unions, but some benefits are shared between these types of financial institution options.
Some of the benefits of banks include the following:
- More convenience: With many traditional banks operating as national chains with branches in many major cities, it's more convenient to do your banking with one of these institutions versus a credit union that operates only in a certain city or region. You'll likely have multiple branch options to choose from and may find they have more flexible hours that fit your schedule. Banks may also offer free ATMs for convenience.
- Broader product selection: Although it depends on the specific bank or credit union, traditional banks tend to offer more product options. You may find a wider variety of checking and savings accounts that appeal to different audiences, such as students who are new to banking and those with significant funds saved. You can also typically find free checking and savings account options.
- Fewer barriers to join: Unlike with credit unions, at a regular bank, you don't need to worry about proving you live in a certain place or have a particular membership to open a checking or savings account or sign up for a loan or credit card. You just need to be of legal age, show identification and be able to meet any specific financial or credit requirements for the account you want to open.
- Online-only bank options: Alongside banks with brick-and-mortar locations, you can find online-only institutions that you don't see with credit unions. These are a benefit since you can often get better interest rates, technological features and lower fees when going the online-only bank route. The cost savings from the online bank having fewer costs (no physical branches and less overhead) passes down to customers.
- More online and mobile banking features: If you're someone who enjoys the convenience of online and mobile banking apps, then you'll usually see more features when you go with a bank versus a credit union. For example, it's common to see banks allow you to deposit checks using your phone's camera and banking app, take advantage of money transfer services with friends and family and get access to mobile apps that let you conduct most non-cash transactions from home.
- Safekeeping of funds: Your CD, checking and savings account funds are safe when your bank has FDIC coverage. You can even put money in accounts across different banks so that you don't exceed the $250,000 coverage limit.
Disadvantages of Using Banks
While banks can offer a lot, they have disadvantages that can make credit unions worth considering. Here are some of the main ones:
- Customer service quality: The customer service offered at banks can vary. While you might have 24/7 customer service, the bank's customer service can suffer when the main focus is on profitability, and this can cause conflicts. The service may seem less personalized than at a credit union where there are fewer members and where the members have a say in the financial institution's operations.
- Worse account terms: Whether you're borrowing or saving money, using a bank can put you at a disadvantage over using a credit union. It's hard to offer high interest rates on savings or low interest rates on cards and loans since the bank has to consider its profitability. Accounts also come with more strings attached when it comes to fees and avoiding them.
- Less flexible account qualifications: While a credit union may show more flexibility toward those who are less creditworthy, banks usually stick to their rules when it comes to things like credit scores and histories. So, while they're open to anybody, for some people banks can come with more barriers to actually opening an account.
Benefits of Choosing Credit Unions
Credit unions have some perks that avoid the common disadvantages of traditional banks. Here are some reasons why you might opt for this type of financial institution:
- Sense of community: Since you have part ownership in your chosen credit union, you get a sense of community you won't find at banks. Credit unions often offer special programs to help your community, whether they provides scholarships to needy students or make donations to local causes. You also get a say in how the credit union operates since you get voting rights.
- Better account terms: The non-profit focus means that credit unions look out for their members rather than investors. When making the most money isn't the focus, credit unions get to offer better rates to their members and can afford to charge lower fees. This comes in handy when you can pay a lower interest rate for a mortgage or get a higher dividend for your CD. Credit union members may also get free checking and savings accounts.
- Financial education options: Since they focus on helping customers, credit unions tend to offer more financial education to their members than banks do. For example, you might get to attend workshops and learn about personal finance, or the credit union may have an education section on its website or mobile app with tools to check out.
- Personalized service: If you're someone who has a poor credit history or is new to banking, credit unions are usually more willing to work with you and even help you improve your situation. For example, when deciding whether to give you a loan, they might consider your overall payment history rather than just your credit score. If your credit score is really low, they may even offer tips on boosting it so you can qualify for more financial products.
- Safekeeping of funds: The NCUA coverage protects up to $250,000 of your money at the credit union. Further, you may have options to get additional insurance if your deposits are more than that amount.
Disadvantages of Choosing Credit Unions
Along with the unique perks of credit unions, be aware of these considerations that differ from those of a traditional bank:
- More limited access: Credit unions may have more limited banking hours and fewer physical locations to visit. This can be less convenient, although you may have free ATMs to use after hours alongside online and mobile banking services.
- More requirements to join: You must meet all the credit union's membership criteria and bring documents providing your residency or membership in a particular group just to do your banking there. This means you may not qualify for a particular credit union at all, and you can expect a more thorough application process if you do.
- Less account variety: You can expect the basic types of accounts and loans, but credit unions may have fewer options within those categories. For example, a credit union might only offer Visa card options, but a traditional bank may have cards from other issuers available, such as American Express.
Choosing Banks vs. Credit Unions
To decide between credit unions and banks, you need to look at your preferences, banking needs and eligibility as you explore options in your community. If you want the most convenience and advanced technology, then you might opt for a traditional bank with branches around the country and a thorough online banking system. But if you want to work with a small financial institution that offers personalized service and gives you better terms, then finding out if you're eligible for a local credit union may be a good idea.
Read More: How to Choose a Bank That's Right for You
Before choosing any bank or credit union, it's worth doing some research to learn about the product offerings, quality of service and actual account terms. Don't assume that a credit union always offers better rates, as you might find an online bank that's comparable. It can also help to talk to current customers or members to get a better idea of what you can expect with a particular option.
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Ashley Donohoe has written about business and technology topics since 2010. Having a Master of Business Administration degree, bookkeeping certification and experience running a small business and doing tax returns, she is knowledgeable about the tax issues individuals and businesses face. Other places featuring her business writing include Zacks, JobHero, LoveToKnow, Bizfluent, Chron and Study.com.