Credit unions have a lot in common with banks, but there are some significant differences. Unlike banks, credit unions are not-for-profit financial institutions that are owned by their members, which gives credit unions some advantages over banks.
Even though they offer many of the same products as banks, credit unions also have a few drawbacks. Here are the pros and cons of credit unions.
Pros of credit unions
- Lower rates and higher yields. Credit union profits go back to members, who are shareholders, enabling these institutions to offer lower rates on loans, including mortgages, and higher yields on savings products, such as share certificates (or CDs).
- Lower fees. Federal credit unions are exempt from federal taxes. As a result, you are likely to pay lower fees, and fewer of them, on checking accounts and other products than you would at banks.
- Variety of products. Large credit unions have product lineups that rival many banks, including checking accounts, savings accounts, money market deposit accounts, share certificates, mortgages, auto loans, student loans and credit cards.
- Your money is insured. If a credit union is a member of the National Credit Union Administration, members’ deposits are federally insured by the NCUA’s Share Insurance Fund for up to $250,000 per depositor.
- More personal service. Credit unions are usually local or regional, which means service may be more individualized.
- Educational resources. Credit unions tend to be big on financial literacy, so it’s common for them to offer seminars, articles, calculators and other tools to help their members sharpen their money skills.
Cons of credit unions
- You must become a member. Since most credit unions comprise members who share something in common, such as a workplace or industry, you must meet eligibility requirements to become a member and partake of the products and services. Membership requirements are often fairly lenient, though, and joining may be as simple as depositing $5 into a savings account.
- You may find better rates elsewhere. You might be able to find a higher APY on a share certificate or savings account or a lower rate on an auto or other type of loan at online-only banks, which do not have the expense of maintaining branches.
- Limited accessibility. Credit unions tend to have fewer branches than traditional banks. A credit union may not be close to where you live or work, which could be a problem unless your credit union is part of a shared branch network and/or a large ATM network like Allpoint or MoneyPass.
- Not all credit unions are alike. Smaller credit unions may not offer as many loan and deposit products as big credit unions and banks. They also might not offer the latest technology, such as online banking, mobile banking and peer-to-peer payment platforms, such as Zelle.
How credit unions differ from banks
Though banks and credit unions offer many of the same products and services, there are some noteworthy differences between them.
- Banks are for-profit institutions that generally charge more fees and require higher minimums to open and maintain accounts. Banks also pay taxes, whereas credit unions are not-for-profit organizations that don’t pay federal taxes.
- Banks are run by shareholders who want to maximize profits. Credit unions return all profits to their members by offering higher rates on deposits and lower rates on loans.
- To do business with a credit union, you have to become a member, but banks are open to anyone. You can walk into any bank and apply for a loan or open an account without having to meet membership requirements.
- Online and traditional banks tend to have sophisticated digital tools to offer customers, such as mobile banking and online banking. Credit unions, especially smaller ones, may be less technologically advanced.
Deciding between a credit union and a bank
Do you prefer mobile banking to branch banking? Is earning as much as you can on your savings a top priority? If you’re trying to decide whether to join a credit union or go with a bank, determine what you need and want most from a financial institution.
Once you’ve got a clear idea of what you’re looking for. Bankrate’s list of top big banks and credit unions can help you zero in on the best options. Draft a short list of your favorites, then compare the products and features that matter to you most.
Once you’ve made a choice, visit a branch or go online and open an account.
A credit union may be a good option if you are looking for higher APYs, lower loan costs and a closer relationship with a financial institution. Consider the pros and cons of credit unions, do your homework and make the choice that’s best for you.