The first “bank” account I ever opened was at a credit union. I was only 15 at the time, co-signing the document with my mother, and I didn’t know the difference between a checking account and a savings account. In fact, I was even more perplexed with the credit union terminology of share draft and share accounts. In the many years since, I’ve come to understand the value of credit unions, why they’re so great, and why they use such odd terminology.
Credit unions are structured differently than banks. The biggest difference between a credit union and a commercial bank is in who owns it. Shareholders and investors own a commercial bank, so the bank has a big incentive to generate profits for their owners. Credit unions are owned by the depositor, which means there’s less of an incentive to earn money because that money just goes back to the people who save their money with the credit union. Credit unions generally charge lower interest rates on loans and offer higher interest rates on deposits because they are responsible to depositors, not shareholders and investors looking for a good return.
Higher interest rates on deposits, lower interest rates on loans. Credit unions are able to offer higher interest rates because they don’t have an incentive to generate large profits. In theory, since depositors own the bank, profits should be paid out to the depositors. They can skip the bookkeeping by simply giving customers better rates.
Credit unions are much smaller. Most credit unions have a handful of branches and have a smaller footprint than a regional bank. There are a few that have a large presence, but none that rival the size of a national bank like Bank of America. While the smaller size doesn’t guarantee more personalized service, it’s more likely that a smaller bank with fewer customers will spend more time on each person. You pay for this with a smaller ATM network and fewer services, so it’s a trade-off. You have to do a little extra work to avoid ATM fees but it’s usually worth it.
Credit unions fail less often than commercial banks. There’s almost no comparison between the frequency of failures at banks insured by the Federal Deposit Insurance Corp., or FDIC, and credit unions insured by the National Credit Union Administration, or NCUA. As of the end of May, 44 FDIC insured institutions had failed in 2011 compared to nine NCUA insured institutions. This makes sense because, in general, credit unions take on less risk. Because they are smaller, they make fewer loans. Because there is no strong profit motive, they make less risky loans.
The board of directors is staffed with volunteer customers. Because the credit union is owned by the depositors, the credit union is also governed and managed by customers. A credit union’s board of directors is made up of its customers and they all serve on a volunteer basis. If you are so inclined, you can run for a seat on the board. Try doing that at a commercial bank.
As for the weird names for accounts, they reflect ownership. It’s called a share draft account instead of a checking account because you can draft checks out of an account. It’s called a share account to reflect the idea that you are part owner of the credit union. While I’ve since closed my first credit union account because I moved away from home, it still holds a special place in my heart.