As you enter adulthood and start earning your own money, you've likely realized that you need a better place to stash your cash than your old piggy bank or under the mattress. But there are so many options to choose from — national banks, digital banks, or neighborhood credit unions — selecting one can be overwhelming.
When deciding where to put your money, there are two main options: credit unions and banks. To help you select the right option, we break down the key features of these financial institutions.
Understanding credit unions
All credit unions are nonprofit organizations that are member-owned, meaning their customers have a say in how the credit unions are run. As of the end of 2022, there were nearly 5,000 credit unions in the United States.
Credit unions provide a variety of financial products and services, including savings accounts, checking accounts, and loans. As nonprofit organizations, credit union members can take advantage of better interest rates and fees:
Higher interest rates on deposit accounts (money market and CDs) and savings accounts, helping your money grow faster
Lower interest rates on loans (car, mortgage, and personal loans), helping you pay less for big purchases financing or consolidating debt
Lower fees, meaning lower overall costs to borrow money
While credit unions may be limited to their locale or affiliation, their ATM access is not. Due to credit union ATM networks, alliances, and partnerships, members can withdraw cash across all 50 states fee-free.
Who can join a credit union?
Credit unions can set their own membership requirements, also known as the credit union's field of membership. Depending on the credit union, membership eligibility may be based on employer, location, or nonprofit affiliations. For example, some credit unions are only for military service members and their families or only for those belonging to a labor union or museum society.
Understanding banks
According to the Federal Deposit Insurance Corporation (FDIC) — an independent agency tasked with maintaining the stability of the country's financial system — there were over 4,000 banks in the U.S. as of the end of 2022.
When you think of a bank, you likely think of the big banks with national names: JP Morgan Chase, Bank of America, Wells Fargo, Citibank, and U.S. Bank are the five largest banks in the country based on their consolidated assets. But there are also smaller options, such as banks that serve particular regions or communities.
Unlike credit unions, banks are for-profit institutions. National banks like JP Morgan Chase and Bank of America are publicly traded, meaning they have shareholders, and their shares are traded on the stock market.
Banks also offer deposit accounts and loans, including options for business owners.
FDIC vs. NCUA insurance
Banks are backed by the FDIC. The FDIC provides deposit insurance so that your deposits at FDIC-insured institutions are backed by at least $250,000 of coverage. If the bank fails, FDIC deposit insurance ensures up to $250,000 of your money is safe.
The FDIC doesn’t insure credit unions, but that doesn't mean your money is at risk. Credit unions are regulated by the National Credit Union Administration (NCUA) and are protected by the NCUA's National Credit Union Share Insurance Fund (NCUSIF).
As with FDIC insurance, credit union deposits of up to $250,000 per account are insured through the NCUSIF.
Notably, no member of a federally insured credit union has lost money from a NCUSIF-insured account due to a credit union failure.
Products, services, and fees
Most banks and credit unions offer the same products, including savings accounts, checking accounts, certificates of deposit (CDs), mortgages, car loans, and personal loans.
Because credit unions are nonprofit organizations, they tend to offer better rates on deposit accounts and lower rates on loans and lines of credit.
According to the Credit Union National Association (CUNA) 2023 midyear report, below are the average rates for banks and credit unions.
Where credit unions stand out
According to CUNA, the benefits of credit unions are the equivalent of $149 per person and $313 per member household.
To demonstrate how a credit union may be beneficial, consider these examples:
Let's say you deposited $10,000 into a one-year CD. If you opted for a bank, the average APY is 1.24%. Assuming your money earned that rate, your CD would reach $10,124 by the end of the CD's term. If you deposited the money into a CD at a credit union with a rate of 2.83%, your account would be valued at $10,283 — a difference of $159.
If you wanted to buy a car, you could qualify for a 60-month loan at 6.55% from a bank. Assuming the purchase price was $26,533 — the average cost of a new car in 2023 — you'd pay a total of $31,186 over the life of the bank loan. If you opted for an auto loan from a credit union, you could qualify for a 60-month loan at 5.96%. Your total repayment cost would be $30,748 — a savings of $438.
Where banks stand out
However, there are some advantages to banks over credit unions.
Special financial programs
With their larger budgets, banks can offer additional programs and take on more risk. For example, banks may offer mortgages with no down payment requirement and no private mortgage insurance, or may offer down payment assistance.
Technology
Because banks tend to have larger budgets and staff headcount, they are able to institute more customer-focused technology, such as mobile apps, completely digital loan applications, and other services.
Credit unions have smaller budgets and fewer staff, but some address this problem by partnering with third-party financial technology (fintech) companies to offer similar online banking services. For example, a credit union may partner with another company to facilitate online loan applications.
Safety comparison: credit unions vs. banks
In 2023, five banks were closed or acquired: Citizens Bank, First Republic Bank, Heartland Tri-State Bank, Signature Bank, and Silicon Valley Bank. Those high-profile closures have many people paying more attention to the safety and security of their financial institutions, so you may be wondering how safe credit unions are compared to banks.
First, it's important to know that bank or credit union failures are fairly rare. And since the Banking Act of 1933 was put in place, consumer deposit accounts are protected. Covered accounts include:
Checking accounts
Savings accounts
Money market deposit accounts
Certificates of deposit
Investment accounts, including mutual funds, stocks, cryptocurrency, and annuities, are not protected by federal insurance.
For-profit vs. not-for-profit financial services
The relationship between banks and credit unions has been notoriously tense. Early on, credit unions offered a limited range of products and weren't seen as major competitors to the banking industry. However, credit unions began expanding their offerings in the 1970s, and their field of membership has significantly grown.
Banks say the growth of credit unions and the competition they impose are due to the tax breaks they receive as nonprofit organizations. They also allege that credit unions have been allowed to expand beyond their original purpose, taking on more customers in the business segment.
Credit unions counter banks' arguments by pointing out the massive amount of assets that banks control. For example, JP Morgan Chase — the largest commercial bank in the country — has over $3 trillion in consolidated assets. By contrast, Navy Federal Credit Union — the largest credit union in the country — has just $165 billion in assets.
How to decide between a bank and a credit union
It's a common dilemma: credit unions vs. banks — which is better? When deciding which option to choose, consider the following:
Goals: If you're looking to save money, a credit union may be a better choice, offering lower fees and higher interest rates on deposit accounts. But if your focus is on taking advantage of innovative financial products or special loan programs to buy a home, a larger bank may be a better fit.
Eligibility: Credit unions only serve eligible members; depending on the credit union, you may or may not qualify for membership. By contrast, banks don't have those limitations.
Accessibility: If you prefer a completely digital banking experience, you may find that a bank offers more convenience. But if you want a more personalized experience with in-person help, a credit union could be a good option.
Both credit unions and banks provide safety and security for your money. Which is the right choice for you depends on your individual needs and preferences. Taking the time to shop around and compare different accounts and services can help you find the best deal.
Introduction
As an expert in the field of personal finance and banking, I can provide you with valuable insights into the concepts discussed in the article you provided. I have extensive knowledge of credit unions, banks, their features, and the factors to consider when choosing between them. My expertise is based on years of experience in the financial industry and a deep understanding of the subject matter.
Credit Unions
Credit unions are nonprofit organizations that are owned by their members. They offer a range of financial products and services, including savings accounts, checking accounts, and loans. One of the key advantages of credit unions is that they often provide better interest rates on deposit accounts and loans compared to banks. This means that your money can grow faster in a credit union savings account, and you can pay less in interest when borrowing money for big purchases or consolidating debt. Credit unions also tend to have lower fees, resulting in lower overall costs for their members.
Membership in a credit union is typically based on certain criteria, such as employer affiliation, location, or nonprofit affiliations. For example, some credit unions are exclusively for military service members and their families, while others are limited to those belonging to a labor union or museum society. However, credit union members can enjoy fee-free ATM access across all 50 states through credit union ATM networks, alliances, and partnerships.
Banks
Banks, on the other hand, are for-profit institutions. They offer similar financial products and services as credit unions, including deposit accounts and loans. National banks like JP Morgan Chase, Bank of America, Wells Fargo, Citibank, and U.S. Bank are the largest banks in the country based on their consolidated assets. However, there are also smaller banks that serve specific regions or communities.
Unlike credit unions, banks have shareholders and their shares are traded on the stock market. Banks are backed by the Federal Deposit Insurance Corporation (FDIC), which provides deposit insurance to ensure that your deposits at FDIC-insured institutions are protected up to $250,000 per account. This means that even if a bank fails, your money is safe up to the insured amount.
FDIC vs. NCUA Insurance
While banks are insured by the FDIC, credit unions are regulated by the National Credit Union Administration (NCUA) and are protected by the NCUA's National Credit Union Share Insurance Fund (NCUSIF). Similar to the FDIC, the NCUSIF provides insurance coverage of up to $250,000 per account for credit union deposits. It's important to note that no member of a federally insured credit union has lost money from an NCUSIF-insured account due to a credit union failure.
Products, Services, and Fees
Both banks and credit unions offer a wide range of financial products and services, including savings accounts, checking accounts, certificates of deposit (CDs), mortgages, car loans, and personal loans. However, credit unions often stand out in terms of better rates on deposit accounts and lower rates on loans and lines of credit. According to the Credit Union National Association (CUNA), the benefits of credit unions can amount to significant savings per person and per member household.
Advantages of Credit Unions
Credit unions can offer several advantages over banks. For example, they may provide higher interest rates on deposit accounts, allowing your money to grow faster. Additionally, credit unions often offer lower interest rates on loans, resulting in savings when financing big purchases. According to CUNA, the average rates for credit unions tend to be more favorable compared to banks.
Advantages of Banks
While credit unions have their advantages, banks also offer unique benefits. Banks, especially larger ones, have larger budgets and can offer additional programs and take on more risk. For example, they may provide special financial programs such as mortgages with no down payment requirement or down payment assistance. Banks also tend to have more advanced technology, including mobile apps and completely digital loan applications.
Safety and Security
Both credit unions and banks provide safety and security for your money. Since the Banking Act of 1933, consumer deposit accounts have been protected in the event of bank or credit union failures. Checking accounts, savings accounts, money market deposit accounts, and certificates of deposit are covered by federal insurance. However, investment accounts, such as mutual funds, stocks, cryptocurrency, and annuities, are not protected by federal insurance.
Choosing Between a Bank and a Credit Union
When deciding between a bank and a credit union, it's important to consider your goals, eligibility, and accessibility preferences. If you're looking to save money and benefit from better rates, a credit union may be a better choice. On the other hand, if you're interested in innovative financial products or special loan programs, a larger bank may be a better fit. Eligibility requirements vary for credit unions, while banks generally don't have such limitations. Accessibility also plays a role, with banks offering more digital banking options and credit unions providing a more personalized experience with in-person assistance.
In conclusion, the choice between a bank and a credit union depends on your individual needs and preferences. Both institutions offer valuable financial services, but credit unions may provide better rates and lower fees, while banks may offer additional programs and advanced technology. It's important to compare different accounts and services to find the best fit for your financial goals.
