Banks are a nearly ubiquitous institution in modern life. Virtually everyone has a bank account and most have multiple accounts, credit cards, mortgages, investments and more. Where do credit unions fit in though? This is one of the most common questions and misconceptions in the financial industry. You’re not alone and we’re here to help!
What is a Bank?
Banks are for-profit financial services organizations that store money and offer a variety of services to account holders. One of the biggest reason that banks exist, other than being a safe place to store money, is to issue loans. Those loans have interest and fees that deliver profit to the banks. In this way, banks are able to sustain their operations. Banks also commonly offer low interest instruments like CDs or Certificates of Deposit that they can make money on by loaning that money at a higher interest rate.
What is a Credit Union?
A credit union is a financial services organization that is a not for profit entity – specifically, a cooperative. Because of their non-profit status, the fees that credit unions have on their loans tend to be lower and the interest rates on the loans tend to be lower. Similarly, the interest rates on deposits at credit unions tend to be higher than at traditional banks.
The financial products offered by credit unions are essentially the same as what are offered by banks but the terms are generally more consumer friendly. As cooperatives, credit unions have members and the institution exists to serve the membership. As a member of a cooperative, you are generally entitled to voting rights and an ownership stake in the enterprise.
Unlike banks, credit unions are often only open to members that meet specific criteria. That might include employees of a business, members of a certain labor union, residents of a certain area or military veterans. Usually, membership is open to family members of qualifying individuals as well. It sounds like credit unions offer a lot of advantages over a bank. Is that true?
This depends on the individual, but for many people, if you can qualify to be a member of a credit union, it can certainly have advantages over a bank. Some of those advantages are below:
- More consumer friendly interest rates – When you’re shopping for a loan or a credit card, interest rates are one of the most important things to consider. Credit unions, since they are non-profit entities, can offer interest rates that are usually lower than banks on both credit cards and other loans. The interest rates you can get on a car loan at a credit union, for example, can save you hundreds or thousands of dollars over the life of the loan. NOTE: One area that this may not be the case is in mortgages. Since most mortgages are bundled and sold to a third party after the bank or credit union originates them, this market is very stable and credit unions can’t help with the interest rates. That said, you may see lower mortgage origination fees from a credit union.
The interest rates that credit unions offer on deposits are often also weighted in the consumer’s favor. Savings accounts, CDs, and checking accounts will all see higher interest rates from credit unions than with banks as a general rule.
- Lower fees – Banks make a huge portion of their revenue on fees. While some fees are necessary to keeping a the bank or credit union open and covering their operating expenses, credit unions are non-profit organizations so they don’t use fees to generate profits for the organization. That makes loan origination costs, overdraft fees, returned check fees and even wire transfer fees often lower than what banks offer.
- Member focus – While many banks have exemplary customer service, at the end of the day, they answer to their shareholders and the board of directors. With credit unions though, the shareholders are the members, so there’s a strong alignment with everyone who walks through the doors or calls the bank. The credit union exists to serve their members and most to an outstanding job of it. Furthermore, you can be assured that the terms and conditions on loans, the fees on accounts and the particular credit cards that a credit union offers were all designed with the members’ best interests in mind. Contrast that to a bank where each of those is designed to maximize profit and you’ll start to see some considerable improvements at credit unions.
Situations in which banks are actually better than a credit union do happen.
Just a few of those are below:
- Travel – Many banks are national or international. As you travel, it can be much easier to find a branch of a large bank like US Bank, Bank of America or Wells Fargo, than a branch of a credit union. Similarly, most big banks have extensive networks of ATMs which gives you access to quick cash with no fee for the withdrawal. Contrast that to a credit union that probably only has a few ATMs and likely only in one city and it’s potentially a big point in the banks’ favor.
- Technology – The larger national or international banks invest tens or hundreds of millions of dollars into technology improvements each year. That means that those banks will have mobile apps, easy to use websites and full featured online banking. Credit unions on the other hand tend to be small and therefore cannot afford the huge expenditures of the larger banks. They often suffer from slow adoption of new technology, leaving their members at very real disadvantages in convenience and sometimes even security.
- Fewer financial products – Since most credit unions are small, they can only offer a limited number of financial products. Those commonly include checking and savings accounts, credit cards and basic loans. Banks on the other hand tend to have more account holders so they can offer a fuller suite of products. Many credit unions don’t offer mortgages, for example, but nearly all banks do. Banks will also offer other types of savings and checking accounts, business accounts, and home equity lines of credit. If you have specific needs that are more complex than basic accounts and loans, you may be forced to use a bank.
So, should you use a bank or a credit union?
Many people actually use both. If your needs are more complex than basic checking and savings, a simple credit card and maybe a simple personal or car loan, a credit union may not be the right choice for you. In that case, it makes sense to use a credit union where you can for their lower fees and member-friendly policies, then use a bank when you have to for the financial products that you can’t find elsewhere.
If you travel frequently, it probably also makes sense to have a bank account that will allow you easy access to branches and ATMs in any major city and the convenience of a superior online banking experience. At the end of the day though, it’s hard to argue with the fact that credit unions exist to serve their members and can save you considerable amounts of money with lower fees and better interest rates.