When you need a checking or savings account, a loan or a credit card, it’s likely you’ll have many options, including banks and credit unions. While they offer similar services, it’s important to understand the differences between these two financial institutions before making a choice.
Banks are for-profit organizations focused on generating profits for stockholders. In contrast, credit unions are not-for-profit cooperative financial institutions that return their earnings to members in the form of lower and fewer fees, as well as higher rates on loans and savings accounts.
As a result, the customer experience at credit unions often has a more personal feel and is generally rated higher by consumers than at banks. In addition, credit unions are exempt from federal income taxes, which gives them more flexibility to pass on savings to their members in the form of lower or more competitive fees and interest rates on borrowing products.
The primary difference between banks and credit unions is their business model. While both make money to cover their operations, only the amount required to do so is withdrawn from a Credit Union accountholders in the form of deposits. The rest of the money stays in the co-op and is used to provide financial products and services such as loans, deposit accounts, mortgages, credit cards and IRAs. Credit unions are regulated by the National Credit Union Administration (NCUA) and their deposits are insured to at least $250,000 in the same way the Federal Deposit Insurance Corporation (FDIC) insures the deposit accounts of banks.
Credit unions are typically smaller than banks, and they are local to a particular community. Their size may lead to fewer brick-and-mortar branch locations, which can be a drawback for customers who prefer in-person service. However, most credit unions have extensive online and mobile banking options to mitigate this limitation. Additionally, since most credit unions are nonprofits, they have less of a budget for new technology than larger banks and may not offer as many advanced features.
To join a credit union, you must meet membership requirements that are usually based on where you live or work, where you worship, or through associations and causes you support. In some cases, you can become a member by paying a one-time fee to an organization that supports the cause of your choice.
Because they are not-for-profit, it’s important for credit unions to make enough money to cover their operating expenses and to keep their debt to equity ratios low. To do so, they charge some fees to their members, such as account maintenance charges, balance transfer fees and foreign transaction fees. However, these fees are typically much lower than those charged by banks, and the most common ones are free. For example, First Tech Federal Credit Union has a Platinum Mastercard with no balance transfer fee, while the same product from other credit cards in the market charges 3% to 5%. Fortunately, your membership with a credit union is backed by the full faith and credit of the U.S. government through the National Credit Union Share Insurance Fund, which provides coverage for individual and joint accounts up to $250,000.