October 15, 2021
When it comes to how you manage your money, choosing the right financial institution is more important than you might think. These days, we have more options than ever before, including traditional banks, online fintech companies and credit unions. But what is a credit union? And how do credit unions work?
Credit unions have some similarities to banks but differ in a few important ways. This article will compare credit unions and banks to help you decide which may be a better fit for you.
A credit union is a financial institution that is similar to a bank. They offer deposit accounts, credit cards, loans and other financial products and services.
The main difference is that a bank is a private business that is set up to make a profit, while a credit union is a member-owned cooperative that functions as a nonprofit.
In other words, credit unions focus on serving their members, while banks focus on maximizing profits.
Like banks, credit union deposits are federally insured up to $250,000 per account. This means that if the credit union closes unexpectedly, is robbed or somehow loses your funds, the federal government will step in to help. The only difference is that credit union deposits are insured by the National Credit Union Administration (NCUA), while bank deposits are insured by the Federal Deposit Insurance Corporation (FDIC).
Credit unions are technically owned by their members. When you open an account and deposit funds, you own shares of the credit union.
Credit unions are also typically local to a certain area. They may be as small as one or two branches or as large as several hundred locations.
Credit unions and banks have a few things in common, both:
Offer services including deposit banking, loans, credit cards and mortgages
Offer physical locations as well as online banking
Insure their customers’ deposits
What does a credit union do differently than a traditional bank? Some of the biggest differences are:
Credit unions are member-owned, while banks are owned by private individuals or stockholders
Credit unions are nonprofit organizations, while banks are for-profit businesses
Credit unions are smaller and often concentrated in a particular geographic area
Some credit unions are only open to certain people, while banks typically accept anyone with funds to deposit
Are credit unions better than banks? That depends on what you’re looking for in a financial institution. Here is an overview of the pros and cons of credit unions.
The purpose of a credit union is to serve the financial needs of its members. Instead of trying to maximize profits, credit unions give more back to their members in the form of lower fees, higher interest rate savings accounts and other perks.
Some of the primary benefits of credit unions include:
Lower fees: Credit unions typically have lower fees than banks. This can include overdraft fees, ATM fees, service charges and monthly account fees. To be clear, most credit unions do still have fees for many services, but they are usually lower than standard bank fees.
Lower interest rates on loans: Credit unions often offer very competitive interest rates on loans. This can include auto loans, personal loans, lines of credit and even mortgages. This chart from the NCUA compares average interest rates for credit unions and traditional banks.
Higher interest rates on deposits: Credit unions generally pay more in interest on your deposits than traditional banks do. That said, some online banks offer high-yield savings accounts that may pay more in interest than credit unions.
Personalized service: Credit unions are member-owned and often directly serve relatively small communities — this allows for more personalized service, and you can keep your money local.
In many ways, credit unions may have advanages over banks, but it's also important to consider the downsides.
Some potential drawbacks of credit unions include:
Membership requirements: Some credit unions are only available to certain types of members, such as those living in a certain geographical area or working for a certain employer. Credit union examples with membership requirements include Navy Federal Credit Union (for members and veterans of the Armed Forces and their families) and State Employees’ Credit Union (for North Carolina state employees and their families). There are also credit unions with few or no requirements to join.
Limited products and services: Smaller credit unions often don’t have the same selection of products and services that you may find at larger banks. For example, many credit unions offer credit cards, but they typically only have one or two options. Their technology could also be a bit dated.
Fewer locations: Credit unions generally have a limited number of locations, and they are typically concentrated in a particular area. This can be inconvenient when you’re traveling and need to access banking services.
You may go with a credit union if you’re looking for lower fees, higher interest rates on your deposits, and lower APRs on your loans — or if you value supporting smaller organizations and keeping your money local.
Consider a bank if you need more physical locations, a wider selection of financial products and more modern technology.
Don’t forget: You certainly can have accounts at both a credit union and a bank.
Choosing the right financial institution to work with is an important step toward better financial health.
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