At a Glance
Banks and credit unions are both types of financial institutions that offer financial products and services, like savings/checking accounts and loans. They both serve both individuals and businesses, and are subject to similar laws and regulations offering protections to their consumers.
However, that’s about where the similarities end. There are fundamental differences in what they offer, how they operate, and who they serve.
In this article, you’ll learn:
- Key differences between credit unions and banks
- Pros and cons of banks
- Pros and cons of credit unions
- How are banks and credit unions similar
- Are credit unions safer than banks
- Is it right to take a loan from a bank or credit union
- Other factors to consider while choosing a bank or credit union
- FAQs
Key differences between credit unions and banks
| Banks | Credit Unions | |
|---|---|---|
| Profit | For-profit; Banks pay taxes on the profits they earn, and many are publicly traded with paid board members. | Not-for-profit; Generally exempt from federal taxes and some receive subsidies from organizations that sponsor them Often return profits to members in ways like charging less interest on loans, lower fees, and higher rates on savings accounts |
| Membership | Does business with any consumer who doesn’t have a history of banking problems | Must be an eligible member; members share a common bond such as working in the same industry, being part of the same religious institution, living in the same community, etc. |
| Interest rates | Higher interest rates on loan products. Lower interest rates on savings accounts. | Lower interest rates on loan products, even for borrowers with lower credit scores. Higher interest rates on savings accounts. |
| Fees | Often charge higher and greater number of fees. Larger minimum balances. | Fewer and lower fees. May have no minimum balance requirements. |
| Services | Stricter loan requirements. More general services, such as greater variety of loan and financial services. | More personalized service, such as leniency with loan approvals, financial education and outreach, and more. May not offer as many products as commercial banks. |
| Branches | Greater number of branches and ATMs nationwide. | Limited number of branches and ATMs; may be regional. |
| Technology | Typically have more advanced technology, including more online banking opportunities. | Some larger credit unions have advanced technology, but smaller credit unions typically do not. |
Pros and cons of banks
| Pros | Cons |
|---|---|
| Better online apps, tools, and website features | Higher fees |
| Larger ATM network/convenient locations | Lower savings account rates |
| May have a greater variety of financial products and resources | Higher interest rates on loan products |
| Stricter loan product requirements | |
| Higher balance requirements |
Because banks are for-profit and larger financial institutions, they often have a larger ATM network and more, more convenient locations available for in-person banking. They also typically have a greater variety of financial products and resources, including loans and investment opportunities. Finally, they often have more advanced technology and better online resources including mobile applications and website features.
On the other hand, banks also typically have higher fees and interest rates on loan products, but lower rates for savings accounts. They often have higher balance requirements for savings accounts, and stricter loan product requirements. For example, they may not accept a loan application for someone with poor credit.
Pros and cons of credit unions
| Pros | Cons |
|---|---|
| Personalized customer service | Must meet membership requirements |
| Financial literacy resources and education | Fewer locations/ATMs |
| Free checking accounts | Mobile and online banking technology less advanced |
| Lower/no fees | May have fewer financial services/products available |
| Higher savings interest rates | |
| Lower interest rates on loan products | |
| More flexibility/leniency with loan product applications |
Credit unions require you to meet certain membership requirements to become a member, such as living in a certain place, being employed by a certain employer, or others. They also are often smaller, so they have fewer locations and ATMs and their online and mobile banking technology isn’t as advanced.
However, their smaller size and not-for-profit status allows them to provide more personalized customer service, lower/no fees, higher savings account interest rates, and lower interest rates for loan products. They also can provide more flexibility with loan requirements, and may be able to offer loans to borrowers with less-than-ideal credit.
How are banks and credit unions similar?
Despite the variety of differences, there are also some similarities between banks and credit unions. Both:
- Offer savings accounts and checking accounts, and a variety of other financial products such as personal loans, auto loans, and mortgages.
- Offer financial services for individuals and usually for businesses as well.
- Are insured by the federal government, up to $250,000.
- Are subject to similar laws and regulations regarding loans and safety.
Are credit unions safer than banks?
Both banks and credit unions are safe. First, both are federally insured, meaning the federal government requires financial institutions to pay back any money stolen from your account. FDIC banks and NCUA credit unions are both backed and protect up to $250,000 per depositor, per bank or credit union, per ownership category.
Additionally, if your PIN or debit card is stolen and someone takes out or spends money from your account, there are guidelines about how much you get back (typically depending on how soon you report the theft).
Is it right to take a loan from a bank or credit union?
Typically, both banks and credit unions offer a variety of loan products. You can choose a loan product from either a bank or credit union based on your needs.
For example, banks may have stricter requirements and higher interest rates, but they may offer a greater variety of products. Credit unions are less strict when it comes to requirements and they consider additional factors other than your credit score. Their interest rates are also typically lower, but they may have lower loan amounts available than at banks.
Keep in mind that you must be a member of a credit union to even get access to apply to one of their loan products.
Other factors to consider while choosing a bank or credit union
Some questions to ask when deciding between a bank and credit union include:
- Does it offer the online technology you want?
- Is it part of an ATM network? Are the locations convenient?
- What are the fees?
- What are the interest rates on loan products? What are the requirements? How strict or lenient are those requirements?
- What are the interest rates on the savings products? What other investment options does it have?
- What are the customer service reviews? Do the hours work with your schedule?
FAQs
What are the disadvantages of a credit union?
Disadvantages of a credit union include you must meet membership requirements to join. Additionally, most have fewer locations (or the locations are regional) and fewer ATM locations. Smaller credit unions may not offer as many financial products and their technology may not be as advanced as banks.
Why is a bank better than a credit union?
A bank may be better than a credit union because it may have more, more convenient locations and ATMs. There are no membership requirements, and they typically have more advanced technology and online banking. Additionally, they may offer more loan products and financial services than some credit unions.
Should I be worried about credit unions?
Credit unions are typically a safe place to keep your money or apply for a loan product. These not-for-profit institutions are owned by their members and focused on their community. While credit unions can fail, just as banks, it’s rare. Additionally, deposits up to $250,000 at federally insured credit unions are guaranteed just as at banks.
Do credit unions affect credit score?
Applying for membership at a credit union does not impact your credit score. However, applying for a loan product or credit card might. Additionally, it’s important to make your payments on time each month and keep your debt-to-income ratio low; otherwise, your credit score could suffer just as with a credit card or loan from another type of financial institution.
Is my money safer with a credit union than a bank?
Your money isn’t necessarily safer with a credit union vs. a bank, or vice versa. If federally insured, your funds are protected (up to $250,000). Additionally, most offer reimbursem*nt options should your debit card or PIN get stolen and money removed from your account. That said, credit unions serve their members and small businesses (vs. large investors), so they are less likely to take large risks.
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Banks and Credit Unions: Key Differences
Banks and credit unions are both types of financial institutions that offer financial products and services, such as savings/checking accounts and loans. However, there are fundamental differences between them. Here are some key differences:
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Profit: Banks are for-profit institutions that pay taxes on their profits and may have publicly traded shares. Credit unions, on the other hand, are not-for-profit institutions and are generally exempt from federal taxes. They often return profits to their members in the form of lower interest rates on loans, lower fees, and higher rates on savings accounts.
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Membership: Banks do business with any consumer who doesn't have a history of banking problems. Credit unions, however, require individuals to be eligible members. Membership criteria can include sharing a common bond, such as working in the same industry, being part of the same religious institution, or living in the same community.
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Interest Rates: Banks typically offer higher interest rates on loan products but lower interest rates on savings accounts. Credit unions, on the other hand, often offer lower interest rates on loan products, even for borrowers with lower credit scores, and higher interest rates on savings accounts.
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Fees: Banks often charge higher and a greater number of fees compared to credit unions. Credit unions generally have fewer and lower fees, making them potentially more cost-effective for consumers.
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Services: Banks tend to have more general services, offering a greater variety of loan and financial services. Credit unions, on the other hand, may provide more personalized services, such as leniency with loan approvals, financial education and outreach, and more. However, credit unions may not offer as many products as commercial banks.
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Branches: Banks typically have a greater number of branches and ATMs nationwide, providing more convenience for in-person banking. Credit unions, on the other hand, may have a limited number of branches and ATMs, often regional in scope.
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Technology: Banks typically have more advanced technology, including more online banking opportunities. While some larger credit unions may have advanced technology, smaller credit unions may not offer the same level of technological advancements.
Pros and Cons of Banks
Banks have several advantages and disadvantages:
Pros:
- Better online apps, tools, and website features.
- Larger ATM network and more convenient locations.
- Greater variety of financial products and resources.
- More advanced technology and better online resources.
Cons:
- Higher fees.
- Lower savings account rates.
- Stricter loan product requirements.
- Higher balance requirements for savings accounts.
Pros and Cons of Credit Unions
Credit unions also have their own set of advantages and disadvantages:
Pros:
- Personalized customer service.
- Financial literacy resources and education.
- Lower/no fees.
- Higher savings interest rates.
- Lower interest rates on loan products.
- More flexibility/leniency with loan product applications.
Cons:
- Must meet membership requirements to join.
- Fewer locations/ATMs.
- Smaller credit unions may not offer as many financial products.
- Technology may not be as advanced as banks.
Similarities between Banks and Credit Unions
Despite their differences, there are also some similarities between banks and credit unions:
- Both offer savings accounts, checking accounts, and a variety of other financial products such as personal loans, auto loans, and mortgages.
- Both offer financial services for individuals and usually for businesses as well.
- Both are insured by the federal government, up to $250,000, and are subject to similar laws and regulations regarding loans and safety.
Safety of Banks and Credit Unions
Both banks and credit unions are considered safe places to keep your money. Both are federally insured, meaning the federal government requires financial institutions to pay back any money stolen from your account. FDIC banks and NCUA credit unions are both backed and protect up to $250,000 per depositor, per bank or credit union, per ownership category. Additionally, there are guidelines for reimbursem*nt if your PIN or debit card is stolen and money is taken from your account.
Choosing Between a Bank and Credit Union
When choosing between a bank and a credit union, there are several factors to consider:
- Online technology and convenience.
- ATM network and location convenience.
- Fees.
- Interest rates on loan products and savings accounts.
- Loan requirements and flexibility.
- Customer service reviews and hours of operation.
These factors can help you determine which financial institution aligns best with your needs and preferences.
I hope this information helps you understand the key concepts mentioned in the article. If you have any further questions, feel free to ask!
