Credit Unions vs. Banks: 4 Key Differences You Should Know
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When it comes to credit unions vs. banks, the former offer personalized service, lower fees, and better interest rates. The latter offer advanced technology, a diverse array of products, and generous rewards programs. To find your fit, you’ll have to weigh the pros and cons and decide what matters most to you.
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When choosing where to park your money, you’ve got lots of options. Big banks, small banks, holes in the backyard… and credit unions.
Though you’ve probably heard the term before, you may have questions — questions like “what is a credit union?” and “what’s the difference between credit unions and banks?”
Well, don’t worry, ‘cuz we’ve got the answers. Here’s how to determine whether a credit union is right for you.
What Is a Credit Union?
Credit unions offer many of the same features as banks: checking and savings accounts, CDs, personal loans, money market accounts, small-business loans, auto loans, and more.
The big difference is that credit unions are nonprofit organizations that offer banking services to their members only.
In fact, credit unions are cooperatives — which means that, when you join one, you’ll actually become a partial owner. You’ll be able to vote on policy and leadership changes, and will receive your dividends in the form of lower fees and better interest rates.
The first credit union in the United States was St. Mary’s Cooperative Credit Association in New Hampshire, which was founded in 1909 to serve low-income mill workers. And therein lies the other main difference between credit unions and banks: Credit union members must have a common bond of association.
Credit unions, in other words, serve a specific population — be it a certain region, profession, or religious group. To become a member, you generally must be a part of that population or have a family member who’s already joined. Some credit unions also allow anyone to become a member if he or she pays a small fee or donates to a particular nonprofit organization.
Wondering about the security of your money at credit unions vs. banks? Both types of financial institutions carry insurance that covers up to $250,000 per account holder in case of failure. At banks, your deposits are backed by the Federal Deposit Insurance Corporation (FDIC); at credit unions, they’re backed by the National Credit Union Administration (NCUA). Wherever you decide to store your money, make sure it’s insured by one of the above organizations.
Credit Unions vs. Banks: Pros and Cons
While they offer similar financial services, you’ll discover several key differences between credit unions and banks. The former excels in some categories, the latter in others. Here’s what to look out for.
Rates & Fees
Whereas credit unions are nonprofit organizations, a bank’s No. 1 goal is to make money. They have to answer to their corporate shareholders, after all. But when you join a credit union, you become one of the shareholders.
And not only that, but credit unions don’t pay federal taxes — which means they can pass some savings on to you. They often do this through free checking accounts, higher interest rates on savings accounts and CDs, and lower rates on loans and credit cards.
According to a 2020 report from the Credit Union National Association (CUNA), the average credit union offered lower interest rates in most categories, including on used car loans (3.51% vs. 5.03%) and credit cards (9.65% vs. 13.42%). Credit unions also offered superior saving rates on CDs (.98% vs. .43% ) and savings accounts (.17% vs. .09%).
Due to these better rates and fees, CUNA recently estimated that credit unions provided an average benefit equivalent to $115 per member or $241 per household in the past year.
As with every rule, however, there are exceptions. Some credit unions charge higher rates or higher fees than big banks. So be sure to do the math before assuming your credit union offers a better deal.
Winner: Credit unions
Since credit unions generally don’t have many ATMs, some waive out-of-network ATM fees, and others offer access to nationwide ATM networks with thousands of surcharge-free machines.
Options & Flexibility
Since national banks are much bigger than their credit union counterparts, their range of financial products is, too.
Take Chase, for example: It has dozens of different types of credit cards, loans, and banking services. So, if you want to house your entire financial life in one place, it’s easy to do so with a major bank.
Credit unions, on the other hand, generally offer fewer options. Summit Credit Union, a sizeable option in my city, has a total of five credit cards.
Credit union locations are far more limited, too. If you move to a different neighborhood, you could end up far from the nearest branch; if you move to another city, you may be out of luck entirely. And, if you travel abroad frequently, you might have more challenges with your credit union debit card than you would with one from a big international bank.
Once you’re a member of a credit union, you can remain one for life, even if your eligibility changes (because you, say, switched employers or moved to another state).
Technology & Rewards
The average credit union has $286 million in assets; the average bank has $3.5 billion. As you can see, banks have a lot more resources to work with. Which means they often have much better technology than your average credit union.
At most major banks — especially those that offer online banking only — you’ll find sleek websites, convenient mobile apps, and 24/7 phone lines. At credit unions, you may find clunky websites, non-existent mobile apps, and service that shuts down on the weekends.
With all those resources, large banks can also offer superior rewards programs. That’s certainly true when it comes to their credit cards; nearly all of our favorite rewards cards come from traditional banks. Some banks even offer rewards on their checking accounts, too.
By that same token, a big bank like Chase has millions upon millions of customers; more than 25 million access its mobile app in a given month. My city’s credit union, which is the second-largest in the state, has 204,000 members.
Translation? You’ll usually be much less of a number at a credit union. (Though we should note that, for the first time last year, banks beat credit unions in a national customer satisfaction survey.)
Credit unions also excel at educating their members, offering resources and events on important topics like saving and using credit.
In fact, if you have bad credit scores, we often recommend using a local credit union for your loan and credit card needs. Since their bankers can take a more holistic view of your finances, credit unions may be more willing to work with you.
Winner: Credit unions
As you can see, both credit unions and banks have their pluses and minuses. Consider what’s important to you — whether it’s better rates and personal service or mobile banking and flexibility — before making your decision.
How Do You Find a Credit Union?
Ready to give credit unions a try? To find one near you, use the NCUA’s credit union locator or visit aSmarterChoice.org — both will display local credit unions and eligibility requirements. Before signing up, be sure to read reviews and compare fees.
And don’t miss our favorite credit union credit card picks:
- Best for low interest rates: PenFed Gold Visa® Card (Review)
- Best for balance transfers: Aspire Platinum Rewards Mastercard
- Best for avoiding fees: Navy Federal Credit Union Platinum Card (Review)
- Best for travel rewards: NFCU Visa Signature® Flagship Rewards
- Best for cash back: Alliant Cashback Visa® Signature Credit Card
Susan is a freelance writer who specializes in turning complex financial topics into engaging and accessible articles. She's been writing about personal finance for six years, and was previously the senior writer at The Penny Hoarder and a staff writer at Student Loan Hero. Her personal finance writing has also appeared in publications like MarketWatch and Lifehacker.
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