You may be wondering what is the difference between a credit union and a bank? Are credit unions better than banks? Does it matter which one you choose? As with any personal finance decision, it's important to know what financial institution is best for you.
Credit unions and banks both have pros and cons. So, it can be tough to decide which one is right for you. In this article, we’ll explore the difference between credit unions and banks so that you can make an informed decision.
What is the difference between a credit union and a bank?
So, what is the difference between credit union and bank? Well, banks and credit unions ultimately serve the same purpose. You can open checking accounts, savings accounts, and CDs or borrow money through various loans.
But the similarities between the two usually end there. Let's dive deeper into the difference between credit unions and banks to determine which is right for you.
Ownership difference between credit union and bank
Banks are for-profit organizations, and credit unions are nonprofit organizations. While this might seem like a small detail, for-profit or not-for-profit institutions differ in interest rates and fees.
Credit unions are member-owned and member-focused. Because they are a non-profit organization, they invest their earnings back into their members. Usually, this investment is seen in better interest rates on loans, lower fees, and higher interest offered for deposit accounts.
Members vs non-members
Anyone can open an account with a bank as long as they qualify. You can apply for checking and savings accounts or inquire about loans, including auto loans, personal loans, and mortgages.
Credit unions only serve their members. To become a member, you must belong to a specific group. For example, your place of employment may qualify you for a credit union membership. Alternatively, affiliation with an existing member may allow you membership access. Some credit unions also require a specific deposit to join as a member.
Insurance difference between credit union and bank
Both banks and credit unions have insurance protection. Whether you keep your money with a bank or a credit union, each depositor’s funds are insured up to $250,000.
Products, services, and locations
In addition to the differences between the two regarding fees and interest rates, you’ll also see that banks and credit unions offer different products and services. They also offer a different number of locations.
Credit unions may have as little as one location, and they typically offer fewer products and services than banks. Credit unions keep their range of products and services relatively small to focus on providing members one-on-one support.
Banks often have multiple branches throughout the state and sometimes nationwide. With banks, it’s often easier to find in-network ATMs and branches to do your banking than it is credit unions.
The limited locations credit unions have can make it harder to access your money without incurring fees if you have to use a non-network ATM.
Difference between credit union and bank: Pros and cons
The pros and cons are another difference between credit unions and banks. There is no one-size-fits-all approach when it comes to financial institutions. Understanding what both offer will help you decide which is right for you.
Pros of credit unions
Credit unions have many advantages that make them the right choice for their members. Here are the top reasons members prefer credit unions over banks.
Lower interest rates on loans
Because they are non-profit, credit unions may offer lower rates on car loans, mortgages, and personal loans. This can save you money in the long run when you need a loan. You'll still need to meet their requirements for approval, though.
Credit unions typically don’t charge as many fees as banks because they don't aim to acquire a profit. You can often open accounts without paying monthly maintenance fees or secure loans with no origination fees.
However, you should always keep an eye on their list of fees, as you would with a bank. This way you can keep more money in your pocket!
Higher interest rates on deposit accounts
Credit unions can afford to pay higher interest rates on what’s deposited in their members' accounts than banks because they aren't focused on profits.
This is one of the ways credit unions share their proceeds with members. Interest rates are a very important factor to consider when opening an account because you'll want your money to work for you.
More personal service
Since credit unions are smaller and member-owned, the staff may take the time to get to know each member that comes in. This becomes important when being advised on appropriate financial products and services. You'll receive more personalized service and suggestions from a credit union than you would a bank.
Cons of credit unions
While credit unions have a lot of benefits, there are downsides, too. It’s important to understand the disadvantages of credit unions before becoming a member so you know what to expect.
You must be a member
Credit unions are more exclusive. You can’t join and sign up for their products and services unless you first become a member. While some credit unions are easier to join, others may require that you have a specific job or belong to a specialized group to join.
Depending on the credit union of which you’re a member, it may not be as easy to access your money when you’re away from your home branch.
This means you may need to pay fees to use an out-of-network ATM. It may also mean longer wait times since more members need to obtain service at one location.
Limited product and services
Many credit unions cannot offer as many products and services as traditional, for-profit banks depending on their size.
You may find that some credit unions lack services like online bill pay, debit cards with rewards, credit cards, loan options, and business accounts. The restrictions could make managing your finances frustrating.
Pros of banks
Many people choose banks over credit unions for various reasons. Here are a handful of pros to consider when deciding:
You don’t need to qualify for membership
Banks are more accessible because you don’t need to qualify for membership. As long as you have a good banking history, you are eligible to open accounts at any bank.
For these reasons, opening a bank account can take much less time than opening an account at a credit union.
More products and services
With more staff and capital, banks can usually offer a more extensive selection of products and services. This may include more options for deposit accounts and loans. Finances are a personal matter, so having a variety of options that fit your needs is important.
Banks often have many branches, including multiple in your area. They’re also more likely to be a part of a network of no-fee ATMs, making your money more accessible on the go. Having a local branch can be convenient for depositing checks, applying for loans, and more.
More online options
While many credit unions have digital banking options, banks are more likely to have a variety of options. These may include: online banking, mobile banking, and electronic statements, making it easier to manage your accounts.
You may find that their technology is more modern and upgraded than a neighboring credit union due to its for-profit model and varying products/services.
Cons of banks
Banks also have their disadvantages, and understanding them can help you make the right choice for your financial wellness.
Lower interest rates on deposit accounts
Because banks are for-profit, they typically limit the interest rates they offer on deposit accounts. This can be difficult to settle for if you’re looking for a safe place to save your money.
It's important that you at least keep up with inflation because you lose money if your savings interest doesn't grow at the same rate.
Banks often charge fees on their loans and deposit accounts. However, they may offer options to waive the fees, such as carrying a specific balance or receiving a certain amount of direct deposits each month.
If you open an account at a bank, make sure to ask for a list of all of their fees, so you know what to expect.
Less personal service
Many banks serve hundreds of people a day, so they can’t offer more personalized services like a credit union. These methods, among others, are how they are able to offer a wide variety of services. If a personal touch is important to you, a bank may not be the right choice.
Why are credit unions better than banks for some people?
Now you know the difference between credit unions and banks and their pros and cons. But why are credit unions better than banks for some people? Credit unions can be the best choice for some people, especially those who fall into a specific category and prefer one-on-one service.
They invest in their members by ensuring they understand their options to make the right financial choices. They also do this by offering lower fees and better rates.
Credit unions are also a good option for small business owners. This is true for those who need special financial assistance or want to create a working relationship with their financial institution to ensure they are always on the right path.
Others may just prefer the more exclusive feel of credit unions versus being merely a customer at a bank. Credit unions’ personalization, suggestions, and support may be exactly what people want from their financial institution.
Compare the difference between credit unions and banks to choose what's best for you!
So, are credit unions better than banks? Again for some people, yes. It really depends on what your needs are. To determine whether a credit union or bank is the right choice for you, consider what you want from your financial institution. Do you value convenience over personalized service?
Or, are better rates and fewer fees most important to you? Prioritize your needs and decide which option will best meet your financial needs.
You can determine your financial needs by creating the right financial goals. Learn how to create financial goals and work towards them with our completely free goal-setting course! Subscribe to the Clever Girls Know podcast and YouTube channel for free advice on all things personal finance.