April 3, 2020

Credit Unions vs Banks

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Are credit unions better than banks? What's their major advantage? Take a look at the main differences before you join.

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While many people understand the concept of a bank, credit unions might seem confusing.

Both banks and credit unions are financial institutions that accept deposits from customers and issue loans to borrowers.

Credit unions offer many of the same services as banks, such as checking, savings accounts and loans. You need to be a member to use a credit union. The first credit unions only allowed membership to groups who had something in common, such as where they lived or worked. Nowadays, the requirements to join are looser.

What Are the Differences?

The biggest difference between credit unions and banks is ownership. Banks are owned by shareholders who distribute the profits among themselves. Credit unions are member-owned, nonprofit institutions that return profits to members in the form of higher deposit interest rates and lower fees.

Credit unions typically have membership restrictions for joining that can be based on where you live or work. Banks will let most people join, unless you have a history of late payments and overdrafts.

Banks and credit unions also differ in regulation:

  • Banks are regulated at both the state and federal level. Their regulators include the Federal Deposit Insurance Corporation (FDIC) and Federal Reserve.

  • The National Credit Union Administration (NCUA) regulates national credit unions, and the remaining credit unions are regulated by state.

Are credit unions safe?
Yes, most credit unions offer the same protections that banks do. It's important to verify that your credit union is backed by the NCUA so that your money is insured. NCUA insurance provides the same coverage that banks receive from the FDIC.

Credit Union Pros and Cons

Pros

  • Better rates
    • Because they are member-owned, credit unions usually charge lower rates for loans. They also tend to pay higher interest rates on checking and savings accounts.

  • Lower fees
    • Credit unions often offer free checking accounts without a minimum balance or service charge. You'll also pay less for overdrafts and bounced checks.

  • Community focus
    • Credit unions emphasize great customer service for their members. They'll often give back to the community through charity as well.

Cons

  • Restricted membership
    • Many credit unions will prevent you from joining if you don't meet certain membership requirements.

  • Lack of insurance with some credit unions
    • Not all credit unions carry NCUA insurance. Always verify that your credit union has deposit insurance so that your money is safe.

  • ATM availability
    • You may have a difficult time finding a surcharge-free ATM with a credit union since their ATM networks are usually smaller.

Can anyone join a credit union?
Credit unions have membership requirements. Oftentimes, the requirements are centered around where you work or live. If you don't meet those requirements, you can still join if you have a family member who's part of the credit union. You could also be eligible by donating to a specific charity.

Bank Pros and Cons

Pros

  • Convenience
    • Banks often operate more physical locations and have larger ATM networks where you can avoid ATM fees.

  • Technology
    • Big banks have a lot of resources. This makes them more likely to offer newer, convenient technology, like mobile deposit and Zelle.

  • More services
    • Banks usually offer a greater variety of products and services, like retirement accounts and credit cards.

Cons

  • Higher fees
    • Shareholders, convenience, and technology come at a cost, and this means banks often charge higher fees than credit unions.

  • Higher loan interest rates
    • Banks want to make a profit, so they it makes sense for them to charge higher interest rates on loans.

  • Shareholder-driven
    • At the end of the day, banks answer to their shareholders, unlike member-focused credit unions.

Which Is Best for You?

Perhaps the idea of joining an organization and becoming a member appeals to you. You might also not like the idea of handing your money over to a for-profit institution. If so, a credit union is your best bet.

On the other hand, maybe the advanced services and latest technology that come with a bank matter more to you. If you prioritize convenience and easy access, banks have more branches and ATM locations.

When deciding, make sure that you pay attention to the fees and interest rates for the bank or credit union. Ultimately, it's your money and you'll want to make sure that you choose an institution that will help your financial journey.

Best Banks and Credit Unions

Banks

  • Ally Bank
    • Ally is an online-only bank that offers some of the highest deposit rates and lowest fees in the country.

  • Chase
    • Chances are that if you're visiting a city in the U.S., there's a Chase bank branch available. Chase boasts a large variety of credit card products with good rewards programs.

Credit Unions

  • Alliant Credit Union
    • Alliant Credit Union's online-only model serves those looking for a national credit union with lax membership requirements. Alliant's deposit rates on checking and savings accounts often exceed industry standards.

  • Navy Federal Credit Union (NFCU)
    • If you have ties to the army, NFCU could be a good option for you. They operate branches throughout the country and have a robust ATM network.

Bottom Line

These days, it's hard to avoid using the services of either a bank or a credit union. Whether you're looking for a credit card or seeking a mortgage, you'll have to choose one.

Credit unions offer a better return on your money with higher deposit rates and lower loan rates. Banks offer the latest technology and more convenience. It's important to weigh the pros and cons and choose the one that's best for your needs.

Note: This website is made possible through financial relationships with some of the products and services mentioned on this site. We may receive compensation if you shop through links in our content. You do not have to use our links, but you help support CreditDonkey if you do.

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