What's the Difference Between a Bank and a Credit Union?

by Tara Thomas ; Updated May 24, 2018
What's the Difference Between a Bank And a Credit Union?

If you’re a member of a credit union, you may be surprised to know that you’re part of only 16 percent of Americans who use credit unions for their primary banking, according to a recent online Harris Poll commissioned by Affinity Federal Credit Union. The poll revealed that many consumers are actually unclear as to what a credit union is, how it differs from a bank and who can join.

What's the Difference Between a Bank and a Credit Union?

There are several differences between a credit union and a bank. One of the main differences between a bank and a credit union lies in its profit model. Banks are for-profit financial institutions, while credit unions are not-for-profit. Credit unions and banks also differ in that banks are generally open to the public and credit union members must be eligible to join. Credit unions are also owned by and share profits with members, while banks only offer large dividends to a relatively small number of shareholders or owners. Credit unions, however, are often able to offer better terms, rates or reduced fees than their larger counterparts.

How Does a Credit Union Work?

A credit union works by passing the profits it generates on to its members in the form of lower interest rates when lending money, or higher interest paid for interest-bearing accounts such as savings accounts or certificates of deposit. As with banks, you are able to open a checking or savings account, as well as receive other financial services including car or personal loans using a credit union. Credit unions can also offer its members more favorable terms on these accounts and loans, like minimal fees. Credit unions still make money in the same ways as traditional banks – through fees or interest from loans – but instead of distributing profit to shareholders, as with banks, they exist to serve members who then benefit from perks like higher returns with this type of banking model.

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How Does a Bank Work?

Banks work by charging fees and using the money that you deposit into a savings account or CD. However, that's not the end of your money's journey; after you deposit money into a bank, it doesn't stay there long. The bank uses this money, and the money from its other account holders, to in turn loan to businesses or other account holders for things including home or car loans. Banks then receive interest on these loans from borrowers that is paid to its account holders. But, being a for-profit enterprise, banks aren't in the business of sharing earnings or profits with account holders. Instead, banks pay large dividends to their shareholders, while giving account holders a much smaller return on their deposits.

Can Anyone Bank with a Credit Union?

If you think you have to belong to some special group or industry in order to become a member of a credit union – or it has to be offered through your job – then you’re not alone. According to the Credit Union National Association, 40 percent of respondents to a July 2017 poll believed they could not join a credit union. While it is true that you do have to meet certain criteria before being allowed to join – such as membership made available through your job or other affiliation – these criteria vary greatly, and there are credit unions you can join that have very broad eligibility requirements. For example, in order to join the Los Angeles Federal Credit Union, you must live in the greater Los Angeles area, and donate at least $5 to the Los Angeles Charitable Association, or LACA. Relatives of existing LAFCU members, as well as LAFCU employees and their relatives, may also join.

What Are the Advantages of Using a Credit Union?

One advantage of using a credit union is, because credit unions are smaller and more personal than large banking conglomerates, they have excellent customer service. A 2017 American Consumer Satisfaction Index Finance and Insurance Report found that credit unions ranked one point higher than traditional banks in overall customer satisfaction – 82 out of 100. Members also have the right to vote on matters that affect the credit union, which is another advantage that appeals to some consumers. You can also elect those whom are responsible for governing the cooperative, as credit unions are largely operated by a board of volunteers.

What Are the Advantages of Using a Bank?

While credit unions can offer members low interest rates and minimal fees, banks generally offer customers access to more ATMs or branches and varied account types, which are an advantage over credit unions. Banks are also open to the general public, and may offer account holders more bells and whistles such as banking apps or mobile banking deposits.

About the Author

Tara Thomas has been a writer and traveler since 1997. Her articles appear in various online publications. She also has experience authoring grant proposals for a Southern California marine science laboratory, which helped her develop a lifelong interest in environmentalism. Thomas is an event planner, has a Bachelor of Science in marine biology from California State University, Long Beach, and worked as a mortgage consultant since 1998.

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