They offer the same kinds of products and services. What is it that distinguishes banks from credit unions, and what does the difference mean to you?
Don't let the name fool you. Whether the words "credit union" or "bank" appear in the name, what really matters when choosing and using a financial institution is the level of service it provides to you. As an account holder, you know which products and services impact your daily financial life, and that matters more than the name of the financial institution. So what does it matter if you keep your money with a bank or a credit union?
From the outside, they may appear similar. They offer the same kinds of products and services, with comparable fees and rates. What is it that distinguishes banks from credit unions, and what does the difference mean to you?
From the inside, the two types of financial institutions have different business structures. The most important distinction between them is that banks are for-profit entities and credit unions are non-profit. This means they approach their relationship with you differently. Let's take a closer look at each and see which best fits your finances.
What makes banks and credit unions unique
Banks and credit unions have state and national affiliations. Each has a charter that identifies its creation and the government agency that regulates them. National banks and federal credit unions are insured by two distinct organizations: the Federal Deposit Insurance Corporation (FDIC), which insures banks, and the National Credit Union Association (NCUA), which insures credit unions. These two national organizations support each type of institution, but the differences between banks and credit unions are primarily about their internal structures.
Community banks serve locally
You may know that giant, too-big-to-fail banks are designed to make huge profits. The main difference between these national megabanks and community banks is that smaller, local banks keep their profits in the communities they serve.
The profit margins, corporate priorities, and professional values for a nationwide bank are entirely different from those of a small, local bank, but they are all for-profit businesses.
Credit unions are non-profits
Alternatively, credit unions are not-for-profit, tax-exempt entities designed so that the account holders are the owners of the financial institution. For this reason, account holders are known as members, rather than customers. The members have voting rights on the operation of the credit union and elect the board members who establish and maintain its bylaws and charter.
The board is made up exclusively of members who volunteer for the positions. There are no stockholders influencing a credit union's business decisions, just fellow members. Savings accounts are commonly known as share accounts at credit unions because the member owns a share in the credit union when they open a savings account.
Credit unions and co-ops
Credit unions are designed in a similar style to the business model of cooperatives. Especially in smaller communities, cooperatives are small groups of companies or businesses united towards a shared economic goal. In many parts of the United States, energy companies started as cooperatives to bring electricity, phone service, and later internet service to rural communities. It's easy to see why credit unions are often found in smaller population centers.
But larger credit unions also have bigger affiliations. Credit unions may be affiliated with a specific business or industry, such as a government department, a national corporation, or a professional industry, like teachers or firefighters.
As a benefit, since they are non-profit, any earnings generated by a credit union may get returned to members in the form of lower loan rates, possibly a higher deposit interest rate, lower fees, and additional financial services.
Credit union myths
One myth about credit unions is that they’re exclusive, that not everyone can join as a credit union member. There may be times this applies, especially when the credit union is affiliated with a specific employer. Each credit union's charter defines the parameters of membership, but it can be broad and include a wide geographic region surrounding the credit union's location.
You may just need to verify that you live or work (and sometimes have additional associations, such as belonging to a church) in the service area for the credit union. Banks rarely have these charter limitations.
Similarities between credit unions and banks
While there are some clear differences in how banks and credit unions work, the bigger differences are found when you look at how big banks (what we typically refer to as megabanks) compare to local banks and credit unions. Here are some of the ways that credit unions and local banks are similar:
Local financial institutions focus on community first
Both credit unions and community banks focus on serving the local community. Their local focus means they're more likely to support local businesses and keep more money in your region of your state, rather than sending those profits and benefits elsewhere.
Local banks and credit unions also both have reputations for providing more personalized service to account holders than their larger counterparts. Smaller local and regional banks and credit unions offer the same banking services as big banks, but usually for less. This includes common services, like opening a savings account, checking account, or another type of deposit account, such as certificates of deposit.
Banks and credit unions both offer a wide variety of services and financial tools
When you need to borrow money, local banks offer a variety of loan products, too. Whether you’re looking for a mortgage, a home equity line of credit, an auto loan, or — in some rural communities — agriculture loans, community banks and credit unions lend money to suit a community’s wide array of needs. In addition to offering competitive loan rates, borrowing money locally rather than from national banks or online lenders keeps those dollars within your community and supports the overall local economy.
In addition, local banks and credit unions are excellent resources for small businesses, providing tools like business credit cards and small business loans. They sponsor community activities and events. Even just simple tasks like offering coin counting machines for credit union members or providing notary services at local banks facilitate basic services in local communities.
Small banks and credit unions offer the convenience of up-to-date tech
Even services where you may expect to find differences, such as 24-hour customer service and SMS messaging, are becoming standard at community banks and credit unions, as have online and mobile banking. Some local banks and credit unions even include credit score monitoring and P2P financial services. Don't fall for the old adage that bigger is always better. Smaller is often spectacular.
The big differences
You might think that those megabanks offer better loan rates because they operate in bulk, like a big-box store, but often local banks and credit unions can offer you a lower interest rate because they want your business.
Consider, too, that many small financial institutions offer rewards checking accounts, so you can find accounts that equate to lower fees with free checking, ATM refunds, and even cash back rewards. If a too-big-to-fail megabank has equal or higher fees or charges a higher interest rate on your loan, what's the advantage of a nearby ATM? Not much.
But the big difference between community financial institutions and those big national banks is the economic support and strength that both community banks and credit unions bring to your local economy. Doesn't it make sense to provide business opportunities to your friends and neighbors in your community?
Making the best banking choice for you is probably more complicated than deciding between banks vs. credit unions. Research all your local banking options and see how they compare based on your personal needs and your community's well-being.
If you still have any hesitation on whether you should switch from your big bank to a better local alternative, consider that there is a reason you've made your community your home — because it is the place you want to live your best life.