The Differences between Credit Unions and Banks
Jump to section:
- Basic Terminology Differences
- For Profit vs Not-For-Profit
- Board of Directors
- NCUA vs FDIC
- Eligibility Requirements
It may seem that credit unions and banks offer the same products and services upon first glance. Both types of financial institutions give people a variety of options for saving money, writing checks, using debit cards, and getting loans. The same opportunities for financial solutions may exist at both credit unions and banks – but it doesn't mean those solutions are created equal. Here are some of the major differences between credit unions and banks:
Basic Terminology Differences
When you have a financial account with a traditional bank, you're considered an “account holder”, or a customer. When you have an account through a credit union, you become a “member” which essentially makes you a partial owner of the organization. All members of a credit union are equal owners with equal voting privileges.
A “savings account” at a bank is called a “share account” at a credit union, while a bank “checking account” is called a “share draft.” “Certificates of deposit” are called “share term certificates” at a credit union.
For Profit vs Not-For-Profit
The primary difference between a credit union and a bank is their tax status. A bank is a for profit organization, while a credit union is not-for-profit.
Bank profits are returned as earnings to their stockholders. Stockholders receive their income through the bank customers. In order to serve the stockholders’ interest, banks are incented to charge higher interest and fees in order to drive higher profits. The benefit of the bank’s for-profit nature is that it also incented to drive innovation in order to attract and better serve its customers. As such, banks often offer valuable features and services that credit unions are slower to adopt. Large banks are also more widely available across the United States (and internationally), giving account holders more access to in-network ATMs and branch offices for conducting banking away from home.
Since the credit union isn't out to turn a profit, it can return its earnings to the members in the form of higher interest rates on savings products and lower interest rates on loans and credit cards. If a credit union should bring in more money than it requires to operate the organization, it will distribute the overage in the form of dividends to its members (everyone who has an account).
Board of Directors
Account holders of banks do not have a vote in the decisions made by a bank. The board of directors of a bank is required by law to make decisions in the best interest of the stockholders – not the customers of that bank. A stockholder of a banking institution does not need to use that bank for his or her financial needs.
The board of directors for credit unions is elected by the members. This gives members more of an influence on the credit union, as each member has an equal vote no matter how much money they have on deposit or the number of accounts they have through the union.
NCUA vs FDIC
Credit unions and banks are regulated by different organizations and use different insurance funds, but the coverage is similar. Most credit unions are federally regulated through the National Credit Union Administration (NCUA), while the deposits are insured by the National Credit Union Share Insurance Fund. It's important to note that not all credit unions offer government-backed insurance, so be sure to verify that your credit union is a member of the NCUA before selecting the financial institution.
The United States government created an independent agency to protect individuals against the loss of their deposits and interest earnings if an insured bank should fail. The Federal Deposit Insurance Corporation was created in 1933 after thousands of banks failed during the Great Depression and many people who had money saved in banks lost some or all of their funds. As a result, President Franklin D. Roosevelt and Congress created the FDIC to federally guarantee that deposits up to certain limits would be safe. Since the creation of the FDIC, no depositor has lost a “penny of FDIC-insured funds” (https://www.fdic.gov/edie/fdic_info.html).
Account holders are currently insured by the FDIC up to $250,000 – but if you own deposit accounts as different ownership categories you can qualify for more than $250,000 in coverage. For example, if you own individual, joint, revocable trust accounts and certain types of retirement accounts at the same bank, it is possible for the total insured amount from these accounts to be greater than $250,000 based on ownership percentages. (https://www.fdic.gov/edie/fdic_info.html#06)
The National Credit Union Share Insurance Fund (NCUSIF) is similar to the FDIC, except that it insures member accounts of federal and state-chartered credit unions rather than account holders at banks. It was created by Congress in 1970 and is also backed by the United States government.
Members’ deposits are federally insured up to $250,000 per individual depositor. It is also possible to qualify for more than $250,000 in coverage if you spread your money across different ownership categories, including, for example: individual accounts, joint accounts, revocable trust accounts and certain types of retirement accounts. (http://www.ncua.gov).
It was President Franklin D. Roosevelt who signed the Federal Credit Union Act into law in 1934, making it possible for credit unions to operate. The credit unions’ field of membership (FOM) requirements are based on the Federal Credit Union Act of 1934 and more recent government acts. Banks have been fighting against credit unions since they began. Banks claim credit unions have an unfair advantage because they are exempted from most federal and state taxes due to their not-for-profit cooperative structure, and have spent a fortune trying to get legislation to either stop credit unions completely or limit who is able to join them.
Both credit unions and banks are required by federal law to verify the identity of the applicant using information from your application. Banks are then given the decision-making power as to who is eligible to become a customer, while credit unions must comply with the field of membership that is defined within their charter.
Eligibility requirements for opening accounts with a credit union are a little more complicated, but have been made easier in recent years. Most people can qualify for certain credit union memberships based on where they live, work, go to school, or worship – or based on what associations they belong to. Most credit unions will qualify an individual based on a family member's eligibility – so if you yourself don't qualify but your mother or brother does for example, you can become a member. Some qualifying associations are extremely easy to join; accordingly, many people will consider joining an eligible association simply to gain access to a credit union membership.
The Credit Union National Association indicates there are more than 90 million members currently belonging to credit unions around the United States.