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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:
Just a few of those are below:
So, should you use a bank or a credit union?
Many people 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.