When it comes to managing your finances, choosing between a credit union and a traditional bank can be a daunting decision. Both institutions offer similar financial services to individuals and businesses, such as savings accounts, loans, and credit cards. The business structure and priorities of credit unions and banks are quite different meaning each institution can serve consumers and businesses better than others. We will break down the key differences between credit unions and banks to help you make an informed choice that aligns with your financial goals.
What is the Difference: At a Glance | ||
| Credit Unions | Banks | |
Tax Status | Not-for-profit. | For-profit. |
| Ownership Structure | Owned by their members. | Owned by shareholders. |
| Deposit Insurance | The National Credit Union Administration (NCUA) insures up to $250,000 per share owner, per insured credit union, per account ownership category. | The Federal Deposit Insurance Corp (FDIC) insures up to $250,000 per depositor, per insured bank, per account ownership category. |
| Interest Rates | On average, they offer better savings rates and lower borrowing costs across loan and product categories. | Generally, less competitive in terms of interest rates for deposit accounts and loan products. |
| Fees | Lower and fewer fees. | High and more frequent fees. |
| Technology | Generally, lag in new technology. | Often quicker to roll out new apps and other tech. |
| Location Accessibility | Credit unions generally have very few branch locations but may offer CO-OP Shared Branching (a national network of over 5,900 partnering credit union branches and self-service locations). | National banks have many branch locations; regional banks don’t have quite as many. |
| ATMs | Members have access to nearly 30,000 surcharge-free ATM locations across the U.S. | Must use branded ATMs to avoid surcharge fees. |
What are Credit Unions?
Credit unions are financial institutions that operate on a not-for-profit basis, focusing on serving their members rather than maximizing profits. Founded on the principle of people helping people, credit unions aim to provide affordable financial services to their members. Credit unions are smaller and more localized financial institutions, serving nearby communities.
They operate as a cooperative, member-owned financial institution meaning credit unions are owned and operated by its members. Credit unions are democratically governed, giving each member one vote in banking decisions such as electing the board of directors. The board of directors are volunteers and not compensated for their role.
Because of the not-for-profit status of credit unions, they must establish a field of membership (FOM). The field of membership is a common bond amongst its members, like where they live, work, or worship. The FOM is the legal definition of who is eligible to join the credit union. You may be able to join based on your:
- Employer (Occupational)
- Geographic Location (Members live, work, worship, or attend school in the same geographic area)
- Membership in a Group (Members belong to a particular church; professional, civic, or fraternal group, or labor union)
Others that are within a close relationship with a credit union member may also be eligible to join. Eligibility requirements vary depending on the institution. Information on eligibility is best found on the credit union’s website.
Credit unions are federally insured by the National Credit Union Association (NCUA). NCUA insures up to $250,000 per share owner, per insured credit union, per account ownership category. Learn more about share insurance coverage.
What are Commercial Banks?
Commercial banks are open to the general public, both individual consumers and businesses. They operate as for-profit organizations, meaning they are either privately owned or publicly traded. In terms of ownership structure, banks are typically owned by shareholders who invest in the institution with the expectation of earning dividends on their shares. This shareholder-driven model influences many decisions made by banks to maximize profits and shareholder value.
Shareholders can vote on matters of corporate policy like the makeup of the board of directors, initiating mergers or acquisitions, or approving dividends. Unlike the single-vote rights that individuals commonly possess in democratic governments, the number of votes a shareholder has corresponds to the number of shares they own.
Overall, while credit unions prioritize serving their members’ best interests without focusing on profits, banks aim to generate revenue through various financial products and services offered to customers.
Consumer deposits are insured by the Federal Deposit Insurance Corp (FDIC). Coverage insures up to $250,000 per depositor, per insured bank, per account ownership category. Learn more about deposit insurance coverage.
Comparing Interest Rates, Savings Rates, & Fees
Credit unions and commercial banks offer most of the same loan options, including mortgages, home equity loans, home equity lines of credit (HELOCs), personal loans, credit cards, auto loans, and more. However, their organizational structure drastically changes borrowing costs and savings rates for their account holders.
Credit Unions
The not-for-profit status of credit unions translates to a member-centric redistribution of end-of-year profits. Under this model, profits are reinvested back into the credit union and the community, serving in the form of low interest rates on loan products, lower fees, and higher interest rates for investment and savings accounts.
Credit unions use account deposits and other earnings to provide members with competitive interest rates. Credit unions typically offer better savings rates and lower borrowing costs across the board. On average, credit union members earn more on their deposits and pay lower borrowing costs in nearly all twenty-three loan and product categories.
Look at the NCUA’s quarterly report on product comparisons offered by credit unions compared to for-profit banks.
Applying for a loan can be a smoother process as well. Credit unions generally have more flexible lending requirements than traditional banks. They have local employees making decisions and can factor in things like length of employment, co-borrowers, and other personal factors impacting your credit. They are often more willing to work with borrowers who have less-than-perfect credit.
Because credit unions have unique memberships, they often have special loans and product promotions for the local community they serve. There can be exclusive products just for educators, veterans, law enforcement, and more.
Credit Unions Advantages
- Low Interest Rates on Loan Products: Credit unions use account deposits and other earnings to provide members with competitive interest rates.
- Higher Savings Rates on Deposit Accounts: On average, credit union members earn more on their deposits.
- Less Account Fees: Since credit unions do not have shareholders to satisfy, they tend to have fewer and lower fees. This means that you can save money on things like overdraft fees, ATM fees, insufficient funds, and monthly maintenance/service fees.
- CO-OP Shared Branching and ATMs: Credit unions’ cooperative structure means they support each other’s members for most transactional needs. Joining a credit union gives you access to a network of credit unions called CO-OP Shared Branch. Credit union members have access to nearly 30,000 surcharge-free ATM locations and more than 5,900 convenient branch and self-service locations covering all 50 states. This makes accessing your money just as easy and hassle-free
- Personal Connection: Credit unions provide a more personalized banking experience and often uphold the values of their local community.
- Community Involvement: As member-owned organizations, credit unions focus on building strong relationships within their communities. Profits are often invested in their local community to offer free services like financial education, donations, or scholarships.
Credit Union Disadvantages:
- Number of Locations: With credit unions being local or regional financial institutions, they are often smaller, have few branch locations, and may not serve your area.
- Eligibility for Membership: This requirement for membership at a credit union may deter individuals who do not work, live, worship, go to school, or do not have family members associated with a nearby credit union.
Banks
Because banks aim to maximize profit and shareholder returns, you’ll often find that they charge higher rates on loan products, more fees, and low rates of return on savings products.
Getting a loan or product at a bank can be a more difficult experience. Bank customers must contend with strict credit requirements. Automated underwriting is often utilized to make automated decisions. The process uses algorithms instead of human beings to make underwriting decisions that are quicker but can exacerbate inequalities in the lending market. While banks may have a wider range of services and locations, their profit-driven model can sometimes lead to decisions that prioritize profits over customer satisfaction.
When it comes to managing finances and managing transactions, large businesses and corporate entities have distinct needs that may differ from those of individual consumers. In such cases, traditional banks often offer more comprehensive services and benefits compared to credit unions.
One major advantage of banks for large businesses and corporate entities is their ability to handle large volumes of capital and provide specialized services tailored for corporations, such as commercial loans, lines of credit, and cash management solutions. Banks typically have larger capital reserves, allowing them to lend significant amounts to businesses in need of financing. This makes them a more suitable option for companies looking to expand or invest.
Bank Advantages:
- More Branch Locations and Variety: Commercial banks are much larger institutions and have many physical locations all over the U.S. There are over 4,000 FDIC-insured commercial banks with nearly 70,000 branches.
- Advanced Technology: Online banking and mobile apps are generally more advanced at banks, so managing your accounts online is easier. With their faster adoption of new technology, banks may provide a better experience for people who prefer to bank from their computer or phone.
- Better for Large Businesses, Corporate, or Government Entities: Banks can better handle large volumes of transactions and support specialized services and products tailored to businesses.
Bank Disadvantages:
- High Interest Rates on Loans: Being for-profit institutions, you’ll often find that banks charge higher rates on loan products and have strict credit requirements with automated decision-making that may deny borrowers with less-than-perfect credit scores.
- Low Rates of Return: Banks generally are less competitive than credit unions in terms of interest rates for savings and investment accounts. Many banks pay their customers little to no interest on savings accounts and products that are well below U.S. Treasury bond rates.
- Account Fees: Service charges are another way banks make their money. The fees they impose on their customers are based on the products, ranging from account fees (monthly maintenance charges, minimum balance fees, overdraft fees, and non-sufficient funds charges), safe deposit box fees, and late fees. Many loan products also contain fees in addition to interest charges.
- Customers are Limited to Bank Branches and Branded ATMs: Since banks do not support each other’s customers, performing transactions or withdrawing money must be done at the bank branch or branded ATMs to avoid surcharge fees.
Which Financial Institution is Best for You?
Banks and credit unions are both reliable financial institutions to keep your money safe and meet your lending needs. To decide which institution is best for you, consider what you value from your banking experience. If you value personalized services and a community-oriented approach, a credit union may be the better option for you. However, if convenience and digital banking are top priorities, then a bank might be a better fit. It ultimately depends on your individual needs and preferences. We recommend researching and comparing different options before making your decision to ensure that you choose the financial institution that aligns with your financial goals and values.
Credit Unions vs. Banks FAQs
Are banks safer than credit unions?
FDIC banks and NCUA credit unions are both backed by the full faith and credit of the U.S. government and offer similar protections. Both institutions protect up to $250,000 per depositor, per federally insured bank or credit union, per ownership category.
What is the main difference between banks and credit unions?
The main difference between credit unions and banks lies in their ownership structure. Credit unions are owned by their members, whereas banks are usually owned by shareholders. This means that credit unions prioritize serving their members’ best interests and aim to provide affordable financial services. Banks aim to maximize profit and shareholder returns.
How can I find a credit union or bank near me?
Use CO-OP’s credit union locator to find a participating shared branch location near you.
- Find a location by telephone: Call 1-888-SITE-CO-OP (888.748.3266)
- Find a location near you by text (Data carrier rates may apply): Text a ZIP Code to 91989 . You will receive a text with the address of the closest CO-OP ATM and the closest Shared Branch location.
- Find a location by downloading the CO-OP Solutions Mobile APP
Use BankFind Suite to find FDIC-insured banks and branches.