Both credit unions and banks essentially serve the same purpose — they manage people’s liquid cash. They offer savings rates, checking accounts, and even lending options. However, how they go about handling people’s money and the policies they follow are different.
Banks are for-profit financial institutions either privately or publicly owned. While credit unions are nonprofit financial institutions that are owned by the same members using its services.
If you’re considering whether to go with a credit union or a bank, make sure to weigh the pros and cons of each before making a decision. Take a look at our guide for comparing credit union vs banks for everything you’ll need to know.
What is a Credit Union?
A credit union is a non-profit financial enterprise owned by its members and managed under cooperative principles. Like traditional banks, they offer deposits, lending options, and a variety of other consumer financial services.
Unlike banks, credit unions don’t distribute profits to a private owner or shareholders. All profits are re-distributed to members in the form of higher savings rates, lower loan rates, fewer fees, and more. In this way, credit unions function for the benefit of their members, rather than the aim of maximizing profit.
Although not always the case, most credit union members are often also connected outside of the credit union itself. They may all belong to the same community, company, or faith. They may all be members of another organization or share a kinship through other factors.
Although most Americans are more familiar with banks than credit unions, credit unions manage a significant portion of Americans’ money. As of early 2019, federally insured credit unions reached 117.3 million memberships and $1.51 trillion in total assets.
How Do Credit Unions Work?
When you open an account with a credit union, you automatically become a member as well. In the same way a bank works, your deposits are combined with other members’ deposits to finance various banking services.
The banking services offered vary according to each credit union. For example, some credit unions might sell stocks or offer investment accounts while others may not. On average, most credit unions usually offer the same services traditional banks offer, such as:
- Checking accounts
- Savings accounts
- Credit cards
- Debit cards
- Financing options like auto loans, mortgages, home equity lines of credit, personal loans, etc.
- CDs, money orders, safety deposit boxes, etc.
- Online/mobile services
- Rewards programs
Within a credit union, members elect a board of directors to manage the credit union following everyone’s’ best interests. In this way, credit unions function like democratic institutions.
Unlike traditional bank accounts, your deposits within a credit union aren’t FDIC-insured. But this doesn’t mean that your money isn’t protected. Credit Unions belong to their own insurance fund, which is the National Credit Union Administration (NCUA).
The NCUA is a federal agency that regulates credit unions and also ensures depositors up to $250,000 in case a federally chartered credit union fails. Most state-chartered credit unions are also insured. Either by the NCUA or through private insurance.
Note that the NCUA issues annual grades for credit unions, whcih assess fiscal health and management. If you’re actively searching for credit unions, make sure to consider its NCUA annual grade before making deposits.
Credit Union Pros and Cons
All in all, credit unions offer the same types of banking services found at traditional banks, including checking accounts, savings accounts, credit cards, and so on. Deposits within credit unions are also protected and insured by the federal government. Given all these similarities, how do you know if you should choose between a credit union or a bank?
We’ll go over all the credit union pros and cons so that you can make a decision.
Advantages of a Credit Union
Credit unions come with a host of advantages over banks. Take a look below.
- More competitive interest rates: Whether it’s a savings account or personal loan, one of the major benefits to credit unions are the highly-competitive interest rates they offer. Savings rates on savings accounts, checking accounts, and CDs are almost always higher when compared to traditional banks. You’ll also shell out less money if you take out an auto loan, mortgage, or credit card from a credit union
- Lower fees: Traditional banks are notorious for pesky fees. While most credit unions will also charge certain fees, they’re typically less expensive than the fees traditional banks charge. Most credit unions also offer free checking accounts
- Lower account minimum balances: Most credit unions require an account minimum balance of $10 or less. While most banks require accounts to have a balance upwards of $10
- Better customer service: Credit unions are often renowned for offering more personalized customer service than traditional banks. Because most credit unions operate as a community, it’s easier to receive direct access to employees that can help with loans or other financial transactions
- Easier loan approval: Credit unions have less-rigid lending requirements than traditional banks and are more likely to approve loans. People with poor credit or a previous bankruptcy have also found it easier to receive financing options at credit unions
- Stronger community: Because credit unions operate through cooperation and are member-focused, they tend to invest more heavily in their communities. There is often greater concern for solving wider community issues and more resources available to members. It’s common for credit unions to offer financial literacy training, classes, or information for members and their families
Disadvantages of a Credit Union
Although there are many benefits to credit unions, they are not without their drawbacks. Make sure to consider the disadvantages of credit unions before you begin making deposits.
- Membership eligibility: Credit unions are not available for everyone. Although criteria have become increasingly relaxed over recent years, more often than not you still need to belong to a specific group to qualify for membership. In other cases, you may be able to join a credit union by paying a fee
- Limited branches: Because credit unions are community-run organizations, they naturally have fewer branches than nation-wide banks. You won’t have the convenience of in-person service when you travel outside the area your credit union serves
- Limited Service: Although most credit unions offer the same types of services traditional banks offer, this isn’t always the case and you might have fewer choices for financial products
What is a Bank?
A bank is a financial institution that receives deposits from customers and uses those funds to finance loans and other financial services with the aims of making a profit. Banks can be privately held, however, most are publicly owned and actively trading on global exchanges.
The profits a bank collects is either distributed to owners if it is private or to shareholders if it is publicly owned. There are many different types of banks such as commercial, investment, corporate banks, and retail banks. However, most consumers receive their banking services from retail banks.
Banks play a fundamental role in handling people’s money, safeguarding their funds, and offering opportunities to finance homes, cars, etc. All bank accounts are FDIC-insured for up to $250,000.
Like credit unions, some banks may be local to specific areas. On the other hand, there are also large-scale nationwide banks. All banks have a common goal of maximizing profits.
Standard Banking Services
Depending on where you bank and your net worth, the banking features you will have at your disposable will vary. However, most retail banks will offer the following services to consumers.
- Checking accounts
- Savings accounts
- Credit cards
- Debit cards
- Financing options like student loans, mortgages, home equity lines of credit, personal loans, etc.
- CDs, money orders, safety deposit boxes, etc.
- Mobile banking
- Rewards programs
Some banks may even offer investment accounts, financial planning, retirement planning, wealth management, brokerage accounts, and more.
Bank Pros and Cons
Banks are most Americans’ first choice when it comes to financial services. But they are not without their pros and cons.
Advantages of a Bank
There are many reasons why people deposit their money into banks. Take a look at the distinct advantages banks offer.
Convenience: Banks offer an unparalleled level of convenience when it comes to accessing funds — this is especially true for nationwide banks. Banks offer a wide variety of financial services and more opportunities for accessibility. Most nationwide banks, for instance, have branches in urban areas across the U.S.
Advanced technology: Most banks offer mobile banking apps and online banking services. These digital features often come with intuitive interfaces that make it easy to access a wide range of services electronically. Oftentimes, you can pay bills, check your balance, apply for credit, cash checks, speak with customer service representatives, and more all from your mobile device
Disadvantages of a Bank
Banks have their share of disadvantages as well. Take a look below.
High rates and fees: When you borrow money from a bank, whether its a personal loan, auto loan, mortgage, or open up a credit line, you’ll likely receive a higher interest rate than you would from a credit union. Likewise, you’re bound to pay more in ATM fees, overdraft fees, and other kinds of fees
Stricter loan requirements: It’s typically more difficult to secure lending from a bank over a credit union. Banks have strict eligibility requirements and will look into your credit score, banking history, income level, and more. If you’re slacking in one or more of these areas, you might have to contend with a higher interest rate or even face disapproval
Credit Union or Bank: Which is Right for You?
Want more information on credit union vs banks? Compare the best credit unions and banks according to what’s most important to you.
| Service | Bank | Credit Union |
| Checking Accounts | Axos Bank | Boeing Employees Credit Union |
| Savings Accounts | Capital One | Boeing Employees Credit Union |
| Investment Services | Bank of America/Merril Lynch | Alliant Credit Union |
| Mortgages | PNC Bank | VyStar Credit Union |
| Credit Cards | Chase | PenFed Credit Union |
| Personal Loans | U.S. Bank | Consumers Credit Union |
| Nationwide Branches | Chase | State Employees’ Credit Union |
| Free ATMs | Axos Bank | Alliant Credit Union |
| Mobile App | MoneyLion | Alliant Credit Union |
| 24/ Hour Customer Service | Ally | Credit Union One |
| Online Portal | Ally | Alliant Credit Union |