You may think that banks and credit unions are pretty much the same thing. They both offer checking accounts, savings accounts and ATMs. They both make loans. But there are some big differences that you need to keep in mind when deciding which type of institution to entrust with hard-earned money.
The differences between banks and credit unions run deep — all the way down to their fundamental structure and purpose.
- For-profit enterprises held by private owners or stockholders.
- Account holders are called “customers,” and the bank uses their money to make consumer loans and other investments.
- Any revenue left over after the bank covers all its costs goes to its owners as profit.
- Other than their ability to pick up and move their accounts, customers don’t have much say in what goes on at their bank, since the institution is expressly run for the benefit of the owners, not them.
- Nonprofit enterprises (and thus exempt from most taxes).
- Account holders are called “members,” and they all have an ownership stake in the credit union.
- Like a bank, the credit union uses account holders’ money to make loans, but unlike a bank, any “profits” go back to members in some form.
- The structure of credit unions generally gives members much more say over how the institution is run than customers at banks have.
Those dissimilarities can ultimately make a big difference to the consumer.
“A credit union is not for profit, so if there are any profits, they’re usually returned to the members in the form of discounted lending, higher deposit rates and servicing the accounts,” says Gavin Magor, a senior financial analyst with Weiss Ratings, a provider of bank, credit union and insurance company financial strength ratings.
Another big difference: Not just anyone can join a credit union.
“Practically anyone is free to open an account or get a loan from a bank. There aren’t many membership requirements, whereas credit unions are there for a specific group of people who share some commonality, and you need to be able to meet that requirement in order to join,” Magor says.
That “common bond,” as it’s known to regulators, could be anything from working for the same company or industry, to residing in the same town, to having family members who are eligible to join. But with 110.6 million credit union members in the U.S. alone, according to the Credit Union National Association, or CUNA, most people who live in a reasonably populated area are probably in at least one credit union’s “field of membership.”
Still, that’s one reason credit unions tend to be smaller than banks.
If you care about being treated like a human being when dealing with your financial institution, rejoice: Banks and credit unions are both capable of offering good customer service.
In fact, getting good treatment from your financial institution is more about size than it is about whether it’s a bank or credit union, says David VanAmburg, managing director of the American Customer Satisfaction Index.
In the most recent ACSI Finance and Insurance Report, released in November 2016, regional and community banks averaged 83 out of a possible 100 points for their overall customer service, just ahead of credit unions, which came in at 82. Both were higher than national banks, which averaged 77.
“Customer service tends to be much better the smaller that you go down the chain,” says VanAmburg. “It’s about that local feel, that personalized attention.”
Of course, that small size can come at a cost: convenience. National banks have a big edge over both smaller banks and credit unions when it comes to the availability of ATMs.
Fees and interest rates
Credit unions tend to have fewer and lower fees than their bank counterparts.
According to Bankrate’s 2017 Credit Union Checking Survey, 84 percent of credit unions offer free checking accounts, meaning there’s no minimum balance requirement to avoid a monthly maintenance fee. Meanwhile, just 38 percent of banks offer free checking, according to our latest checking account survey.
And while a credit union will charge you an overdraft fee, just like your bank will, if you spend more than the balance in your checking account, the fee will probably be less. Bankrate’s latest figures show the average overdraft fee at banks is $33.38, compared with $27.76 for credit unions.
Interest rates are another area where credit unions have an advantage over most banks, VanAmburg says. Basically, banks, being for-profit businesses, pay as little interest on deposits as they can get away with because their obligation is to make as much money as possible for their owners. Credit unions, on the other hand, generally pay as much interest as they can afford to without losing money. (Yes, losing money is bad, even if you’re a nonprofit.)
While they’re generally equivalent to banks of similar size, credit unions typically lag behind the largest banks when it comes to fancy technology, mostly because they just don’t have the size or scale to compete with the major banks, Magor says.
“There’s a huge difference, even within the banking industry. The technical capabilities of the larger operators simply take away any opportunities for smaller banks to compete,” Magor says. “Ultimately, dollars buy technology and allow more things to happen, and in the banking industry, they’re not always prepared to spend the dollars.”
That money pays off in mobile apps and websites with more features, more modern design and other perks for customers.