What’s the difference between a credit union and a bank?
In today's vast financial landscape, it can be daunting to find a banking option that truly prioritizes your needs. However, there is a compelling alternative worth exploring: credit unions. Credit unions offer a refreshing departure from traditional banks, with a focus on member-centric service and a multitude of benefits. In this comprehensive blog post, we will delve into the advantages of joining a credit union and why it may be the right choice for you in the credit unions vs. banks debate. While both credit unions and banks are institutions designed to help with your financial needs, the two actually have a few very notable differences.
What is a bank?
A bank is a financial institution that provides a wide range of services, including accepting deposits, granting loans, facilitating transactions, and offering various financial products such as savings accounts, checking accounts, credit cards, and investment opportunities. Banks are typically for-profit entities that aim to generate profits for their shareholders. They operate on a larger scale, serving a diverse customer base, and often have numerous branches and ATMs.
What is a credit union?
A credit union is also a financial institution but with a distinct structure and purpose. Credit unions are member-owned cooperatives that exist to serve the financial needs of their members. They are guided by the principle of "people helping people." Credit unions have a common bond that unites their members, such as living in a specific community, working for the same employer, or belonging to a particular organization.
Unlike banks, credit unions are not-for-profit organizations that operate with the primary goal of providing affordable financial services to their members. Any surplus generated by a credit union is reinvested to benefit its members in the form of lower loan rates, competitive savings rates, reduced fees, and improved services.
Credit unions are run in a way that benefits members directly. It all starts with the fact that credit unions are owned by stakeholders, aka, you! In other words, banks are public organizations, while credit unions are not-for-profit.
According to the National Credit Union Administration, there were more than 5,000 credit unions with over 120 million members as of December 2020.
The credit union motto is “People Helping People,” and it’s no wonder because credit union members quite literally borrow money from one another. Think of the way credit unions operate as a closed-loop: members work with other members to save money so that other members can borrow that same money.
Credit union membership
Most credit unions require that you live, work, worship, or go to school in a certain area of the credit union, while others require that you also work a certain type of job in order to qualify for membership. Meanwhile, anybody can become a bank customer.
Number of members of credit unions in the United States from 2013 to 2020 (in millions, shown in the graphic below):
Source: Statista.com
Ownership differences
One notable aspect that sets credit unions apart in the credit unions vs. banks comparison is the ownership structure. While banks are typically owned by shareholders who seek to maximize profits, credit unions are owned by their members. As a member-owner, you have a direct stake in the credit union's success and decision-making processes. This ownership structure aligns the interests of the credit union with the needs of its members, resulting in a more customer-focused approach to banking.
Another advantage of credit unions is their typically lower interest rates. As not-for-profit organizations, credit unions are able to offer more competitive rates on various financial products, including loans, mortgages, and credit cards. The savings from these lower rates can add up significantly over time, allowing members to save money and achieve their financial goals more efficiently.
By choosing a credit union, you not only become part of a financial institution but also gain access to a community of like-minded individuals who share your values and priorities. Together, you can enjoy the benefits of member ownership, competitive rates, and personalized service that credit unions offer. Make the switch to a credit union and experience a banking relationship built on trust, cooperation, and mutual success.
The private ownership credit unions offer members is a big reason why savings accounts are known as “share accounts” at these not-for-profits. When members take out loans at credit unions, they borrow money from other members. This also explains why members of credit unions are called “members.”
If you have an account at a bank, you’re known as a customer, not a member, because the money borrowed from loans does not come from others that are part of the organization. Banks are therefore funded by investors, just like other public businesses.
Source: CUInsight
Credit union rates
Credit unions are traditionally known for having a community-feel and friendly service. They are also known for offering lower rates on loans, making them a great option if you are considering taking out an auto loan or mortgage loan or even if you want to refinance. Expect lower and fewer fees when you join a credit union.
While banks are known for their convenience, like having more available ATMs and branches nationwide, you’re likely to pay more interest on loans you take from a bank.
Credit unions may be limited to the region, county, or city they’re in. However, credit unions every day are implementing co-op financial services (ATMs you can easily access with no fees even if you are not a member of that specific credit union), updated mobile apps, and more. The co-op shared branch network of certain credit unions has 5,600 branches and 54,000 surcharge-free ATMs that can be used, whether you’re a member of that credit union or not.
Due to being for-profit financial institutions, banks find it hard to compete with credit unions when it comes to lower interest rates and fees. You may end up paying more in fees at a bank for errors, such as bounced checks or overdrafts. The same goes for interest rates on loans and savings accounts.
According to the NCUA, which regularly compares the rates for credit unions versus banks, credit unions produced higher interest rates on Certificates of Deposit (CDs), money market, and savings accounts while also posting lower interest rates on home and auto loans during the fourth quarter of 2020.
Become a member at Frontier Community Credit Union!
Frontier Community Credit Union is a community-based credit union that offers checking and savings accounts, real estate, personal, and auto loans, as well as credit card services to our members. Visit our ‘Become A Member’ page to join our credit union today!
When deciding between credit unions vs. banks, credit unions stand out as a compelling choice. With their member-centric focus, lower loan rates, transparent fee structures, community involvement, and member ownership, credit unions offer a banking experience that prioritizes your needs and empowers you as a financial stakeholder. By joining Frontier Community Credit Union, you can enjoy personalized terms, competitive terms, and much more!
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