Credit Union vs Bank: Which Makes Sense for You?
When it comes to financial services, you have choices. Two specific options you can choose from are found in the form of banks and credit unions. Understanding a few things can help you make a more informed, better decision about which is the best route for you to take.
Keep reading to learn more about the difference between credit unions and banks, including which one might be better for you and the important safety concerns you should be aware of.
Credit Union vs Bank Differences
What’s the difference between a bank and a credit union? The primary differences stem from the business model.
Banks are for-profit institutions that can be privately or publicly traded.
Credit unions are nonprofit organizations that are owned by their members.
Ownership is a key difference between credit unions and banks. A bank can be owned by an individual or group of individuals. Major banks are generally publicly traded companies. Meanwhile, every member of a credit union is a partial owner of the institution.
This leads to entirely different business models. Banks are driven to produce profits for owners or shareholders. Credit unions, as nonprofit organizations that are member-owned, focus on offering benefits for members. This is just one difference between credit unions and banks, though. The following additional operational differences between the two types of financial institutions are also note-worthy.
A major credit union and bank difference is membership. Essentially anyone can open an account and secure services or products from a bank, whether they’re a member or not. With a credit union, though, you typically have to be a member to receive any services. As an example, anyone can walk into a bank and cash a check. To do so at a credit union, though, you’ll likely need to be a member.
As noted, credit union members are also part owners (think: co-op). This means that becoming a member essentially translates into you buying into the business, so to speak.
While banks and credit unions offer very similar services, they function quite differently. Banks, for example, typically have higher, and a wider range, of fees in comparison to credit unions. Some credit unions even offer free checking accounts and other perks you probably won’t get at a big bank (like no minimum balance requirement).
One advantage to choosing a credit union over a bank has to do directly with interest rates. This is partially tied to several differences, but is largely connected to the profit model.
Banks use interest rates to drive returns for investors and owners.
Credit unions aren’t bound by this model, so they can afford to offer interest rates that are more beneficial to members.
For example, rates offered on credit unions’ savings, CDs, and other investments can be higher, earning you more on your money. And from the borrower’s perspective, rates to borrow money from a credit union can be substantially lower, potentially saving you thousands of dollars on the life of a mortgage, car, or other loan.
Be wary of ever opening an account or doing business with a financial institution that isn’t insured by a government-backed agency that protects your money.
Banks are backed by Federal Deposit Insurance Corporation (FDIC) insurance. This guarantees holdings of up to $250,000 per person for any bank account.
Credit unions are backed by the National Credit Union Administration (NCUA), which also operates the National Credit Union Share Insurance Fund (NCUSIF). This insurance also guarantees up to $250,000 per person per account.
In short, when considering what is the difference between a credit union and a bank, backing really isn’t an issue in either case.
Benefits of Credit Unions
Ultimately, credit unions offer a few benefits that distinguish them from traditional banks. If you’re still wondering: why choose a credit union over a bank, consider the following before you open an account.
- Lower fees. Many credit unions offer free checking accounts. They also typically charge lower fees on other services when compared to the cost of doing business with traditional banks.
- Higher rates to make money. Especially for savings accounts and CDs, credit unions typically offer better (higher) interest rates for members than any bank will.
- Lower rates to borrow money. Borrowing costs. But you can enjoy reduced interest rates on the life of any loan when you borrow from a credit union vs a bank.
- Financial literacy. It’s common for credit unions to offer financial literacy services to all members.
- Community presence. Credit unions are often focused on the local community.
Credit Union vs Bank: Which is Safer?
There’s no real safety advantage for banks or credit unions when compared to one another. Both must deal with cyber attacks. While you might expect a national banking chain to have better security, that just isn’t always the case. In reality, an institution’s safety is tied to account insurance, and you get the same caliber of insurance from either banks or credit unions.
So, what’s better, a credit union or a bank?
If you need financial services, then knowing what’s the difference between a bank and a credit union is important. If the lower fees and better interest rates of a credit union appeal to you, it can be a great way to go. If you prefer some of the conveniences that come from national banking chains, that’s also a viable option.
In the end, whatever you choose, at least now you’re armed with the right information to make an informed decision that feels right for you, your needs, and your financial goals.
Want to learn more about the differences Island Federal has to offer? Reach out today to find out how we’re helping members of the Long Island community reach financial security and grow their money and their legacy.