Credit Unions vs. Banks

As you shop around for a new bank account, you may be asking yourself a common question — should you go with a credit union or bank?

Both banks and credit unions provide many of the same financial services. Overall, they have more commonalities than differences. However, knowing what sets them apart can help you determine which will better serve your personal finance needs.

This post will compare credit unions and banks, discussing the unique features, pros and cons of each, and more.

In This Article

What is a Credit Union?

Credit unions are financial institutions that provide banking services and loans to customers. There are currently more than five thousand active credit unions in the US that serve more than 100 million members.

The main thing that separates credit unions from banks is the ownership structure. They are usually cooperatively owned by their members and operate as not-for-profit financial organizations.

This means that when you partner with a credit union, you’re a member rather than a customer and can have a greater influence on how the organization is run. In general, credit unions are smaller than banks, and this creates more of a community-driven feel.

Compare that with banks, which are publicly or privately owned for-profit institutions.

Since credit unions aren’t profit-oriented businesses, any profits they make are reinvested into the institution and its members. As such, credit unions aren’t required to pay federal taxes on income.

Another feature of most credit unions is that they tend to have more eligibility requirements than banks.

For example, they may only offer membership to people within a specific geographic area or they may require you to have family who is already a member. It’s also common for credit unions to only offer membership to specific work or educational organizations.

Financial Products

Like banks, credit unions offer traditional deposit accounts, including savings accounts, checking accounts, and money market accounts.

Credit union members can also apply for credit cards and loans.

Generally speaking, the range of available financial products through credit unions isn’t quite as wide as what you could find at a bank, but only when it comes to commercial banking and investing.

In other words, if you’re looking for an account for yourself, a well-established credit union will typically be able to offer any product you’d find at a bank.

If you’re shopping for your business, however, a bank will typically have more robust services than your local credit union.

Credit Union Features

Credit union accounts are protected by the National Credit Union Administration (NCUA), which means that all deposits are insured up to $250,000.

Since credit unions are usually smaller than banks and greatly emphasize community, the level of customer support provided is arguably better.

Moreover, members have more of a vested interest in the organization.

For example, the credit union’s board of directors is in charge of shaping the policies and direction of the organization. As a member of a credit union, you get to vote for this board. Indirectly, this means members influence the organization’s long-term direction by choosing representatives whose values are aligned with their own.

However, since credit unions have fewer resources than banks, they tend to trend behind when it comes to technological innovation. While credit unions offer mobile banking, the functionality of mobile apps and other digital tools typically trends behind banks.

Credit union members also might not have as much flexibility as banking customers when traveling abroad. While most big banks have partnerships with foreign banks for ATM use and overseas wire transfers, small credit unions might not allow for as many options.

Interest Rates

Whether it’s earned on a savings account or paid on a loan, interest is an important factor in deciding what type of financial partner to go with.

Traditionally speaking, since credit unions aren’t for-profit, they usually provide higher APYs on member accounts. However, with the onslaught of low-overhead online banking options out there, this isn’t always the case.

When it comes to borrowing, credit unions offer lower loan rates on average. According to the Credit Union National Association (CUNA), credit union interest rates on credit cards, auto loans, and mortgages were all lower than banks in 2020.

Lower Fees

Credit unions usually have lower fees than larger banks. Most credit unions offer free checking and savings options and are far less likely to hit you with high and excessive credit card fees.

Credit unions are also known for added flexibility when it comes to free ATM use. They have smaller ATM networks than national banks but often offer reimbursement for out-of-network ATM fees.

Pros and Cons of Credit Unions

To summarize:

Pros:
  • Not for profit institutions
  • Lower fees
  • Higher APYs on deposit accounts and lower rates on loan products
  • Better customer service
Cons:
  • Fewer branches
  • Fewer business products and services
  • Less digital functionality
  • Limited international flexibility

What is a Bank?

A bank is a for-profit financial institution where you can access checking accounts, savings accounts, loans, mortgages, and more.

Banks are generally available to all citizens and can be either privately owned or publicly traded companies. On the whole, banks operate to generate profits for their investors.

It’s important to note that not all banks are created equally.

There are many different types of banks within the banking industry, including traditional banks, online-only banks, regional banks, and national banks. Each of these different bank formats has a unique feel.

Financial Products

One of the biggest benefits of going with a bank over a credit union is the wider range of services that are usually available. From deposit accounts to investment platforms to lending — a bank can serve most of your financial needs.

Banks usually offer both consumer and commercial banking products and even services like wealth management, retirement, and estate planning.

Bank depositors are insured by the Federal Deposit Insurance Corporation (FDIC), which, just like the NCUA, protects customer deposits for up to $250,000 if the bank fails.

Common Bank Features

Features can vary quite a bit depending on the size of the bank, but most offer an online banking platform, debit cards, credit cards, and ATM access. Traditional banks come with the added benefit of in-person support at brick and mortar branches. Online banks tend to add value by charging lower fees and offering user-friendly digital platforms.

Customer service also varies from bank to bank. With big banks, it’s not uncommon to feel like more of a number than a partner. With that said, you can expect less individualized attention. On the other hand, smaller regional banks tend to have more of a community-driven approach.

Interest Rates

The widely-held belief is that banks have lower interest rates on deposit accounts than credit unions, which is largely true. Big national banks tend to offer microscopic APYs. According to a recent report, credit unions offered nearly two times higher savings rates than banks on average (0.17% vs. 0.09%).

That being said, the shift to digital banking is starting to move the needle. Online banks that don’t have the added expense of physical branches now offer rates that are comparable, if not preferable, to those offered at credit unions.

Fees

Large banks are notorious for charging higher fees. Between monthly service fees, minimum balance requirements, overdraft fees, and ATM fees, big banks tend to hit customers with account charges at every turn. That said, this practice is much more common with traditional banks than online banks.

Pros and Cons of Banks

To summarize:

Pros:
  • More account options and financial products, especially for businesses
  • Larger branch networks
  • Better tech
  • Fewer barriers to entry
Cons:
  • Higher fees
  • Lower APYs
  • Less-personalized customer service
  • Higher loan rates

So, How Do You Choose?

As you can see, there’s a lot of overlap between banks and credit unions, so let’s drill it down to the key differences.

Credit unions are a great option for those who prefer a more personalized experience. As discussed, credit unions are communities, and each member has a voice in deciding how the organization operates. Typically, credit unions put members first with low fees, attractive APYs, and quality customer service.

On the other hand, a bank is going to provide you with more options. National banks have branches throughout the country, and online banks can be accessed from anywhere with a data connection.

Banks need many more customers than credit unions do to generate profits for stakeholders. However, this for-profit approach allows for greater reinvestment into technology and services to keep customers happy.

Weigh the pros and cons, think about what matters to you, and go with the option that’s going to serve you and your financial needs best.

Banks vs Credit Unions FAQs

Is a credit union better than a bank?

It depends on the credit union and the bank in question. There are too many of both to say that one is better than the other definitively.

It also depends on your personal finance situation and what you need from your banking partner. With a credit union, you will enjoy more of a community feel, whereas banks come flush with innovative features and tons of financial products. With that said, a credit union might be a better fit for some, while others will be better off with a bank.

What are the disadvantages of credit unions?

A credit union’s biggest drawbacks are that not everyone qualifies, and there are generally fewer services and features. Fewer resources mean fewer product options and lower functioning platforms.

So, if you’re used to the tech and product suites of a bank, it might feel like you’re making a big trade-off with a credit union. Also, even if you find a credit union that’s offering the most amazing features in the world, you may not qualify for it.

Why choose a credit union instead of a bank?

There are many reasons that a person might choose a credit union over a bank, but the most common one is that credit union members tend to value community and profit-sharing. Credit unions usually invest in their members and communities, while banks focus more on the bottom line.

What’s more, credit unions offer higher APYs and lower interest rates than banks on average. They also don’t have as much of a tendency to chip away at your balance with fees.

Bottom Line

Banks and credit unions both offer products, services, and tools to help you manage your daily banking needs.

If you are still stuck on which direction to go, make a shortlist of the most important things you need. Factor in the fees you’ll be looking at and what the customer service reviews look like. From there, it should be easier to make the decision.

Either way, you’ll be on the right track if you choose a provider that helps you grow your deposits with top interest rates and a low fee structure.