Credit Unions vs. Banks — Differences You Need to Know About
Understanding credit unions vs. banks can help ensure you're storing your money in a place that best meets your financial goals.
Contributing Writer at Tally
February 18, 2022
If you're looking for somewhere to keep your money, you're bound to come across two types of financial institutions: credit unions and banks. Though they are similar, some differences between the two are worth considering.
In this article, we’ll compare a credit union vs. a bank. We'll go over the similarities and differences between them so that you can gain a better understanding of which will allow you to best manage your personal finances.
Credit unions: The basics
A credit union is a not-for-profit financial institution. It is owned by members — individuals who have accounts with the credit union. Because credit unions are nonprofits, they receive tax-exempt status.
Banks: The basics
A bank is a for-profit financial institution. It is licensed to receive deposits and make loans. Banks are for-profit institutions and are subject to federal taxes.
Credit union vs. bank: The similarities
When considering a credit union vs. a bank, there are a few similarities that immediately stand out. For one, they tend to offer very similar types of financial products. Though it may vary from one financial institution to the other, the types of products and services that you may commonly find at both credit unions and banks include:
Money market accounts
Debt consolidation loans
Certificate of deposit accounts
Other financial products may be available at both credit unions and banks. For instance, you may find access to:
Last, the best credit unions and banks offer deposit protection on your assets — up to $250,000 of your deposited funds should be insured against loss. Nevertheless, how credit unions and banks go about protecting these assets can vary.
Credit union vs. bank: The differences
There are a few noteworthy differences when comparing credit unions and banks. As we just mentioned, both should protect up to $250,000 in deposited assets.
Banks can offer this protection if they are FDIC-insured. FDIC stands for Federal Deposit Insurance Corporation.
Credit unions can offer this protection if they are NCUA-insured. NCUA stands for National Credit Union Administration.
Whether you decide to put your money in a credit union or a bank, be sure that it’s a member of its respective insurance organization, as this will protect your assets in case of something like the financial institution becoming insolvent.
Another key difference between a credit union and a bank is the fees and rates offered. Because banks have to pay taxes, they often charge their customers higher fees than credit unions do. Additionally, banks tend to offer lower interest rates on checking and savings accounts.
Again, this can vary, but generally, credit unions have lower fees and higher savings rate yields on accounts than banks. Credit unions may even potentially pay dividends on accounts as well.
The opposite is true for loan rates. Banks may charge higher interest rates on loans, meaning they will earn more in interest and it will cost you more. Credit unions may potentially offer lower interest rates on loans, which can save you money.
Credit unions and banks are also different because of their eligibility requirements. Opening a bank account tends to be rather straightforward. Credit unions, however, generally require a membership. Credit union members typically share a common bond, such as:
Living in the same community
Working in the same industry
Having the same religious affiliation
Other credit unions may not have strict eligibility requirements based on a common bond, but they may require you to pay a membership fee.
Many banks have a corporate board that oversees operations. If you go with a big bank or national bank, the board making decisions may not be anywhere close to you. Additionally, they are making decisions that serve stockholders, and not necessarily the members of the bank. This is different from a credit union, where the members running the credit unions may focus more on the community's needs rather than generating profits.
You may also find more perks or more personalized service with a credit union than with a bank, especially if you’re working with a larger bank. Credit unions may offer things like financial education courses, and they may be more willing to work with their members to approve loans.
Figuring out whether a credit union or bank is right for you
When it comes to comparing a credit union vs. a bank, take time to research the respective institutions you're considering. From a high level, it may seem that a credit union offers more perks and is the worthwhile option.
In some regards, this is true. You may find that you can secure better interest rates if you choose to work with a credit union than you would with a traditional bank. You may also find that there is much more of a communal feel.
However, you need to weigh all of your options before making a decision. For instance, some credit unions are so small they have longer teller lines and you may not have access to a mobile banking app. If you travel frequently or prefer to manage money from your phone, an app could be an essential feature for you.
You may also want to consider any minimum balance requirements that the credit union or banking institution carries. For example, a credit union may come with a lot of perks and favorable rates, but they may require a high minimum balance.
It may also be worth your while to evaluate any fees associated with ATMs. If you travel, you may be more inclined to choose a large national bank with ATMs across the country, as opposed to a credit union with a more local reach. Some credit unions, however, will waive ATM fees if you have to use an ATM other than theirs.
When it comes to choosing a credit union or bank, the most important thing to remember is that it should meet your needs. Consider what financial services you're most interested in, and find the institution that best fits your goals.
Staying informed can help you manage personal finances
When it comes to managing money, there are countless decisions that you need to make. Trying to compare a credit union vs. a bank to determine where you should keep your money is an example of one such decision.
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