Credit Unions vs Banks: What’s the Difference?

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Updated on Wednesday, December 11, 2019

Credit unions and banks are similar financial institutions, although there are key differences between them. Both banks and credit unions offer financial services like checking accounts, savings accounts, and certificates of deposit (CDs). They both offer mortgages and personal loans. But banks are for-profit companies, while credit unions are nonprofit institutions that serve their members and their communities. Read on to discover more about the differences between banks and credit unions.

What is a credit union?

A credit union is a not-for-profit financial institution that is formed by another entity, such as a corporation or community group. Ranging in size from small local operations to large nationwide networks, credit unions are owned and controlled by their members, who are also their customers.

Under the credit union business model, members buy shares in their credit union, and their deposits are used to provide loans and other financial products to each other.

A credit unions is run by a volunteer board of directors that is elected by its members. Credit unions are chartered by the National Credit Union Administration (NCUA) or by a state or federal government.

Credit Unions are growing in popularity: The assets of the average credit union have increased from $150 million to $260 million since 2012. Average membership at credit unions nationwide have grown by more than 20% since 2012.

How is a credit union different from a bank?

One of the chief differences between banks and credit unions is their ownership structures. Credit unions are owned by their members, while banks are owned by their stockholders. These different ownership structures dictate how these institutions operate. Credit unions serve the best interest of their members, while banks have a fiduciary duty to their shareholders, not their customers.

Credit unions and banks dispose of their profits differently. As for-profit institutions, banks redistribute their earnings to investors and shareholders. Credit unions use their earnings to reward their members by giving them dividends, discounted loan rates, higher interest rates on savings and investment products, and lower-cost services.

Unlike a bank, not everyone can open an account at a credit union. To join, you must meet certain criteria, which is often dependent on your employer, family, geographic location or membership in a group, such as a professional organization, school, church or labor union.

Finally, customer service can be another difference between credit unions and banks. Bank rules and policies are set by their boards of directors, who are often located in another city. Credit unions, on the other hand, are run by members, who are likely living in the community. In studies, credit unions often rank higher than most banks in terms of their quality of customer experience.

Feature

Credit Union

Bank

Management

Controlled by its members

Controlled by board of directors

Purpose

Serve its members

Make a profit

Revenue

Returned to members through dividends

Distributed to shareholders

Account holder rights

Account holders have voting rights

Account holders have no voting rights

Service

Account holders are members who can help set policies by voting

Account holders have no say in policies

Eligibility

Must meet eligibility requirements to open an account

Anyone can open an account

How to join a credit union

Finding a credit union near you is as easy as an internet search. You may be surprised at the number of credit unions in your area. The NCUA has a Credit Union Locator that can help you find a credit union near you. You can search by your address, the name of the credit union or by its charter number, which is a unique number assigned to the credit union by NCUA.

See if you are eligible

After you locate credit unions in your community, visit their website to learn about their eligibility requirements for membership. If the credit union does not include this information on its website, call or visit its physical location for more details.

In general, anyone who belongs to a certain community or organization may join the community’s credit union. Members typically share a common bond, such as

  • They work for the same employer
  • They live or work in the same geographic area
  • They have a family member who is a member of the credit union
  • They belong to the same organization, such as a religious group, school, labor union or homeowners association

Some credit unions are open to anyone and will approve membership based on charitable contributions. For example, you can join Alliant Credit Union by making a $10 donation to the Foster Care to Success Foundation.

Open an account

If you meet a credit union’s membership requirements, you can open an account by submitting proof of your identity, residence address and proof of eligibility. Then make the minimum deposit, which for credit unions will range from $5 to $25.

Is my money safe in a credit union?

In terms of safety, there really is no difference between depositing money with a credit union and depositing it with a bank, as long as the credit union is a member of the NCUA. The NCUA Insurance Fund provides members of federally-insured credit unions with a maximum up to the legal limit in insurance coverage, which is the same coverage the FDIC offers to bank account holders.

If you have more than one type of account ownership, such as individual accounts, joint accounts, revocable trust accounts and certain types of retirement accounts, it’s possible to qualify for more than the insurance limit in coverage.

Advantages of credit unions

  • Better interest rates: Because credit unions are not-for-profit organizations, they boast competitive rates and fees for their members, unlike commercial banks. Credit union members typically enjoy higher interest rates on their deposit accounts, as well as more affordable loan products.
  • Lower fees: According to the Credit Union National Association (CUNA), credit union members on average can save $102 every year versus banking with commercial banks. For example, credit unions charge about $3 less on average for each non-sufficient fund in a checking account than banks do, and almost $10 less for late payments on credit card debt.
  • Decreased closing costs: In terms of mortgage closing costs, people who use credit unions for loans pay $210 less than those who take out loans from banks.
  • Capped credit card rates: Credit unions have an 18% cap on how much interest they can charge on loans including credit cards, which distinguishes them greatly from traditional bank credit card issuers. Credit unions charged an average 11.82% interest rate on credit card debt; whereas commercial banks charged 13.65%.
  • Personalized loan reviews: If you’re building your credit and want to use a personal loan to establish or improve your credit score, a credit union may be more likely to work with you than a big bank. Members of credit unions may also be able to appeal credit decisions if they’re turned down.
  • A voice and vote: Your deposit in a credit union makes you a part of the ownership of the institution. Interestingly, in this structure, one person’s loan may come from another’s deposit. It also gives you the right to vote.
  • Access to nationwide ATM networks: If you are a member with a credit union, you have access to a national network called CO-OP, which has over 28,000 ATMs across the country and allows anyone who belongs to a credit union to access funds without a charge. This is more than what Chase has (around 16,000).

Disadvantages of credit unions

  • Limited access to branches: While some credit unions work hard to offer the same conveniences as banks, their branch locations are limited compared with megabanks. And you won’t likely find your credit union branch when you travel to another country.
  • Slower to adopt new technologies: Assets of some small local credit unions are often a fraction of those of big national banks. Some don’t even have their own website. They may also struggle to afford higher costs of adopting the new mobile banking technology, which can limit the need to visit a physical branch or ATM location.
  • Fees aren’t always lower: While some fees may be lower at credit unions, that doesn’t mean you can always save money in fees with a credit union. For instance, Chicago-based Alliant Credit Union charges an outgoing wire transfer fee — $50 for international and $25 for domestic. However, Chase Bank, which is also available in Chicago, doesn’t charge an outgoing wire fee for checking account holders.

Credit union vs bank: Which should you choose?

Choosing between a bank and credit union comes down to personal preference. Identify the services and banking experience that matter most to you. Consider things like customer service, online tools, branch location, interest rates and loan requirements. Make a checklist of the features in a financial institution that are most important to you.

Ultimately, it comes down to comparing products, services, fees and convenience. Remember, you can have accounts at a bank and a credit union. In some cases, this may be the best way to determine the right fit for you, allowing you to enjoy the best of both worlds.

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