Note: This article is part of our Basic Banking series, designed to provide new savers with the key skills to save smarter.
For the most part, credit unions tend to offer the most “bang for your buck” with higher interest and lower fees. They are usually the best fit for people who are local, want to be involved in their banking experience both through part ownership in the credit union and seek better customer service.
Banks tend to be the best fit for people who value updated technology options with their banking experience and need access to locations nationwide. If an individual doesn’t need the experience of a traditional brick-and-mortar bank, on the other hand, they might consider an internet bank, as they often outperform even credit unions given their higher interest rates and lower fees.
Whether a bank or a credit union is a better place for your money comes down to your particular needs. Both credit unions and banks are financial institutions that extend loans, accept deposits and provide a wide range of financial services. However, there are big differences between banks and credit unions, including their business models and how you become a customer of one or the other.
Credit union vs bank: What’s the difference?
There are important differences between credit unions and banks, having to do with how you become a customer and the way each type of financial institution operates. Let’s break down the differences and then look at each one separately:
|The key differences: credit union vs. bank|
Credit union vs. bank: can anyone join a credit union?
Certain regional and professionally-affiliated credit unions limit their membership to qualifying members while banks usually offer their services to the general public. Credit union membership requirements have eased in recent years for many nationally recognized credit unions; with many offering membership to anyone who donates to an affiliated charity. Here’s a list of credit unions that are relatively easy to join.
Perhaps the most important element of credit unions is the fact that, unlike traditional banks, these institutions are owned by their members. Credit unions are effectively run by volunteer board members who are elected by the credit union’s members.
For the most part, credit unions are run by the very people who use their services. It’s not that hard to see why this difference is so significant. With credit union members in charge of products and services, it’s no wonder credit unions offer so many perks to their member-customers.
Banks, on the other hand, are for-profit organizations that are operated to maximize profits for their shareholders. Boards are controlled by shareholders, and the board hires a professional management team. With banks, management operates the institutions in a way that delivers the most profit for shareholders.
Credit union vs. bank: interest rates and fees
With banks, the interest you earn on most accounts will generally be lower than at similar account at many credit unions. Leading national bank chains have high operating and marketing expenses, and because they need to consistently return profits to shareholders, you won’t see those profits going to pay high yields on deposits.
However, not all banks are the same. For instance, there are major differences between online banks and brick-and-mortar banks. Online banks have much lower overhead than brick-and-mortar banks, and can provide higher rates for the same type of accounts. Some of the best high-yield savings rates available today come from online-only banks.
As not-for-profit organizations, credit unions are established with the sole purpose of offering value to their members. Rather than answering to investors, a credit union serves their customers.
As a result, profits made by credit unions are used to reduce fees on banking products and offer members higher interest rates on their deposits. In many cases, credit union members can secure lower APRs on loans or earn higher APYs on their savings accounts.
Credit union vs. bank: product offerings
A big benefit you might find with a larger, traditional bank is often in the technology you can access as a customer. If you bank with a large national player like Chase, for example, you’ll get access to benefits like mobile check deposit, online bill pay, the Zelle mobile payment platform, and a helpful mobile app that lets you manage your money from your smartphone or another mobile device.
Credit unions, and especially small ones, don’t always have the most functional mobile apps or the best implementations of all the newer banking technology available. However, larger or more advanced credit unions may offer all the mobile banking benefits you want and need, so make sure to check before you rule them out.
Credit union vs. bank: locations and customer service
There were approximately 5,500 credit unions operating nationwide at the end of 2018. Banks offer a much larger footprint nationwide, although your personal experience will vary based on the traditional bank you choose. For example, Wells Fargo boasted 5,485 physical branches at the end of 2019, while J.P. Morgan Chase had 5,032 bank branches. Opportunity Bank of Montana, on the other hand, only had 22 branches at the end of last year, while First National Bank of Tennessee only had 7.
With this information in mind, it’s important to note that going with a traditional bank doesn’t always mean you’ll be able to access more bank branches or ATMs. You should also check the footprint of any bank or credit union you’re considering, so you can ensure you’ll have all the access you need.
In terms of customer service, many people would say that credit unions have the upper hand. Consumer Reports has even noted that credit unions offer some of the highest ratings among services they’ve evaluated with 96% customer satisfaction overall, compared to just 80% satisfaction with the nation’s three largest banks.
Are credit unions safer than banks?
Neither entity is inherently "safer" than the other when it comes to keeping your money protected. Both banks and credit unions offer insurance to protect your deposits in amounts up to the legal limit.
For banks, deposits are covered by the Federal Deposit Insurance Corporation (FDIC), while the coverage for credit union deposits comes from the National Credit Union Association (NCUA). Both the FDIC and the NCUA are independent of the banks and credit unions they respectively insure, and they’re regulated by the federal government.
Big banks may have a slight edge over credit unions when it comes to security from hackers and thieves, however. Consumer Reports notes that, because the biggest bank branches are constantly under attack, they may offer additional security features like fingerprint log-in options for your account, as well as voice and face authentication systems.
Of course, this is more likely to be true with big banks that offer thousands of branches nationwide, and much less so with smaller banks that only have a handful of locations in a smaller area or region.
Pros and cons of credit unions
|Credit union advantages||Credit union disadvantages|
For the most part, credit unions are popular with consumers thanks to their competitive loan offers and interest rates, and the fact that they offer their members a sense of community. Fees may also be lower than you’ll pay with a larger bank, so credit unions could easily help you save money in the long run.
On the other hand, credit unions can be rather limiting if you do a lot of your banking on the go while you travel. You’ll probably wind up having access to fewer physical branches you can access for in-person banking needs, and it’s possible your credit union won’t have all the top banking technology available, either.
Pros and cons of banks
|Advantages of banks||Disadvantages of banks|
While banks may fall short when it comes to offering attractive interest rates and lower fees, a new surge of online banks continue to impress account holders with interest rates that often outperform those at a credit union. In fact, we found the average savings account at an online bank earned an APY of more than four times the typical credit union or traditional bank.
On the other hand, returns on checking and savings accounts from big banks can be downright paltry. As an example, savings accounts at Chase currently pay an annual percentage yield of only 0.01%.
Big banks don’t always have a great reputation for customer service either, as credit unions consistently outperform them in this category. To get the highest yield on a checking or savings account, you may also need to go with a fully online bank that doesn’t offer any physical branches at all.
Credit union vs bank: Which should you choose?
If you can’t decide between using a credit union or a bank, also keep in mind that you can create your own hybrid banking system. For example, there’s no reason you can’t join a credit union to access lower rates on a mortgage or an auto loan while keeping your savings in an online bank that offers a much higher interest rate.
Should you go with a credit union or a bank? The right answer is different for everyone, so compare options in your area and make sure your decision is an informed one.