Credit Union vs. Bank: Key Differences & Similarities

If you have money you’d like to place in a savings account or need to take out a loan, figuring out which financial institution you’d like to work with is tough enough. But to start, you have to decide between a bank or a credit union.

But what is a credit union versus a bank? Is a credit union a bank? Are credit unions better than banks? Deciding between the two might feel overwhelming, but knowing the differences between a credit union account and a bank account can help you make the right financial decision. In this guide, we’ll clarify the differences to help you determine if a bank or credit union would suit you better.

The similarities between banks and credit unions

Banks and credit unions both offer services like money market accounts, checking and savings accounts, mortgages, and auto loans. They also handle your everyday banking needs, from depositing your paycheck to lending money for significant purchases. To protect your money, both types of institutions hold government-backed deposit insurance. Having an insured account means you can rest easy knowing you’ll receive up to a set limit (currently $250,000 per depositor per bank) as reimbursement if your chosen institution comes up against some financial setbacks and loses any of your money. While the Federal Deposit Insurance Corporation (FDIC) insures banks, the National Credit Union Administration (NCUA) insures credit unions.

No matter which institution you choose, both banks and credit unions usually offer online banking platforms and mobile apps. With these tools, you can check your balance, transfer money, and more with your computer or phone.

The differences between banks and credit unions

While banks and credit unions have overlapping functions, they do have differences. The biggest one is how they operate.

Credit unions are nonprofit, meaning they aren’t owned by investors trying to make a profit. Instead, the members of the credit union (the account holders) are partial owners. They form a community and have a say in how the union works. Any earnings on investments go toward offering lower fees, higher interest rates on savings accounts, and lower interest rates on loans.

In contrast, banks are for-profit organizations that make money for shareholders. This puts their focus more on profits than the account holders — resulting in higher fees and less importance placed on customer care.

One thing traditional banks typically have that credit unions don’t is an extensive network of branches (physical locations) and ATMs, offering more access and convenience. For added convenience, their online banking platforms often have more features and are easier to use. They may also offer more financial services, like high-end investment products and credit cards, and a wider variety of banking products for businesses.

While banks may focus on wider access and services, credit unions focus on wider benefits for the individual account owners. For example, credit unions’ nonprofit status allows them to offer higher interest rates on saving accounts and lower rates on loans and credit cards. Banks, with overhead and profit margins to consider, typically can't match these rates.

What’s trickiest about credit unions versus banks is actually opening an account. Typically, you must meet specific membership requirements to join a credit union, like living in a certain community, working for a certain employer, or having an affiliation with a certain group or organization. Banks, on the other hand, are generally open to anyone.

Credit unions: Pros and cons

Credit unions offer a unique approach to banking and member-centric services. Here are some of the standout benefits of choosing a credit union versus a bank, as well as some of the disadvantages.

Pros:

-Member ownership: With a credit union membership, you're a part-owner. This gives you a say in any decisions or changes the credit union makes.

-Lower fees: Because credit unions are nonprofits, the money they make goes back into the credit union. This helps them offer lower fees, like overdraft and ATM fees, compared to traditional banks.

-Higher interest rates on deposits: Savings accounts can have a higher annual percentage yield (APY), which is the total interest you earn on your account over a year. This can help you maximize your savings with higher earnings.

-Personalized service: Credit unions have a reputation for more personalized service thanks to their cooperative and member-centric structure.

-NCUA insurance: The NCUA insures your account up to a set limit, making sure your money is secure.

-Eligibility for loans: Credit unions can be more flexible with loan approvals, often providing more favorable terms.

Cons:

-Limited accessibility: Credit unions tend to have fewer branches and ATMs, which limits your options if you need to withdraw cash or address an issue in person. If you’re considering a credit union, check to see if they’re part of a shared network, which can broaden their accessibility.

-Membership requirements: You need to meet specific criteria, like living in a certain location or having ties with a certain organization, to become a member. This can make it difficult to join.

-Technology: Some credit unions lag behind in technology compared with their bank counterparts, offering less user-friendly online platforms and apps (or none at all).

Banks: Pros and cons

Traditional banks, with their extensive networks and diverse service offerings, also present a set of pros and cons worth considering when choosing a financial institution.

Pros:

-Accessibility: Banks often have a larger network of branches and ATMs, plus more advanced online and mobile banking platforms.

-Diverse services: Banks typically have a lot more services and products to offer for both personal and business banking. These may include more intricate investment opportunities, high-end credit cards, and unique loan options.

-FDIC insurance: The FDIC insures bank accounts, providing a similar level of security as NCUA insurance for credit unions.

-Technology: Banks often lead in technological innovation, offering sophisticated online and mobile banking experiences.

Cons:

-Fees: Banks can have higher service fees, including monthly maintenance, overdraft, and ATM fees.

-Customer service: The customer service experience can sometimes be more transactional, given that banks focus more on profitability to stay in business.

-Interest rates: Banks often offer lower APYs on deposits and higher rates on loans and credit cards due to their for-profit nature.

Credit unions versus banks: Which is right for you?

To decide which of these two options is best for you, you need to consider your needs and preferences. Here are the four key factors that could sway your decision:

-Fees: Lower fees are more attainable through credit unions.

-Accessibility: Banks offer more branch locations and ATMs, providing wider access and convenience.

-Interest rates: Credit unions have the edge for higher deposit interest rates.

-Services: You can get a broader range of financial services and products from banks.

If you want to keep your fees down and have better interest rates and more say in day-to-day operations, you might consider a credit union. As a member, you'll enjoy lower fees, a higher APY rate on your savings account, and more personalized service.

On the other hand, if you're more concerned about convenience and your variety of options, a traditional bank may be the way to go. They can offer more money-related offerings, more branch locations and ATMs, and usually better technology — meaning you can choose from more financial services and track and access your money more easily.

Ultimately, there’s no right or wrong answer about which financial institution to choose — it all depends on your personal wants and needs for managing your money.

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Please note, the material collected in this post is for informational purposes only and is not intended to be relied upon as or construed as advice regarding any specific circumstances. Nor is it an endorsement of any organization or services.