Banks vs. Credit Unions: What's the Difference?

It's More Than Just Customer Service

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Table of Contents
Image shows a bank and a credit union. Text reads: "The differences between banks and credit unions. Banks: typically for-profit businesses owned by investors or stockholders; a wider variety of people can open an account. Credit union: typically not-for-profit organizations owned by customers; only certain people are eligible to open an account"

Bailey Mariner / The Balance 2020

Consumers can choose to meet their banking needs at banks and credit unions that appear on nearly every block. The many similarities between banks and credit unions might leave you wondering which is right for your own needs.

Both types of institutions allow you to safely deposit or borrow money for a range of uses, but there are differences between the two when it comes to how you want to handle your money.

What's the Difference Between Banks and Credit Unions?

Banks Credit Unions
Owned by shareholders & investors Owned by member customers
Serve the public  Serve members only
Offer topline products & apps May not offer all types of loans
Pay less interest on deposits Pay more interest on deposits
Charge higher rates on loans Charge more favorable rates on loans

Bank vs. Credit Union Ownership

The key difference between banks and credit unions is in ownership. Credit unions are not-for-profit organizations. They're owned and controlled by their customers, known as "members." The primary goal of credit unions is to promote the financial welfare of their members and to return profits to them.

Banks are for-profit organizations owned and run by shareholders. These investors might be thousands of anonymous stockholders or just a few large investors, depending on the bank. The main motive of banks is to maximize profits for their shareholders.

Bank vs. Credit Union Eligibility

Banks are open to the general public. Regional banks that operate within a certain location may limit some or all of their banking products to people in that area. National banks usually extend individual accounts to any legal resident age 18 or older.

Credit unions are required to limit their customer base to a group of people who share a common bond known as the “field of membership." The requirement is relatively easy to meet. You may be eligible to join a credit union because of where you work, where you live, or because of your membership in an organization, such as a school or place of worship. You might also be eligible because a family member is eligible.

There’s a good chance that you're eligible for a nearby credit union wherever you live. Some even serve members remotely or entirely online, allowing you to bank with a credit union in another state.

Bank vs. Credit Union Products

The choice of a bank or a credit union won't limit the products available to most customers—consumers who want to handle personal and small-business finances. The basic offerings at both types of financial institutions are virtually the same.

Most banks and credit unions offer:

  • Checking accounts
  • Savings accounts
  • Money market accounts
  • Certificates of deposit (CDs)
  • Business bank accounts
  • Home loans (including purchase loans and refinancing)
  • Auto loans for new and used vehicles (including motorcycle and RV loans)
  • Land and construction loans

But a bank is more likely to offer specialized products, such as student loans or trustee services. A smaller credit union may not be able to accommodate your needs in these areas, although it never hurts to ask. Some small institutions have partnerships with service providers that allow them to provide these products to their customers.

Both banks and credit unions also offer online banking services and mobile apps for account management, although a bank may offer more cutting-edge features. But both allow you to view your accounts, make deposits with your mobile device, transfer money between accounts, and pay bills.

Rates and Fees at Credit Unions vs. Banks

Both types of institutions make money by lending it at higher interest rates than they pay out on deposits. They also make money through fees. Credit unions tend to offer more attractive rates and fees. Not only are they focused on maximizing profits for members rather than outside investors, but their not-for-profit status exempts them from the same kinds of taxes that banks must pay.

Credit unions tend to offer higher interest rates on savings accounts and CDs, lower rates on loans, and lower account fees than banks. This combination allows customers to maximize their returns on deposits and minimize their loan costs. Banks offer lower rates on customer deposits and higher rates on loans because of their higher tax burden and their motive of maximizing profits for investors.

But not all banks and all credit unions are the same. You might find that some banks offer more competitive rates than credit unions.

Shop around before assuming that a credit union will grant you the better deal.

Security of Credit Unions vs. Banks

Your money is generally safe at either type of institution, as long as the institution holds insurance. The safest insurance available comes from the U.S. government.

The Federal Deposit Insurance Corporation (FDIC) insures funds held at banks with government backing. The National Credit Union Share Insurance Fund (NCUSIF) protects you with the full faith and credit of the U.S. government at federal and most state-charted credit unions.

Some or all of your money may be insured if an institution goes under. Lost funds will be replaced. Your account will end up at a different institution in most cases, and you'll keep the same account number and account balance as before.

Both FDIC and NCUSIF coverage protect up to $250,000 per depositor, per institution. Spread your funds among different account registrations or different institutions if you have more than that amount to manage and safeguard.

It's also possible to have more than $250,000 insured in one place if you have the money in accounts in different ownership categories. For example, your retirement account and your individual checking account at the same institution might be counted separately.

A minority of credit unions offer private insurance coverage, mainly through the company American Share Insurance.

Which Is Right for You?

Both types of institutions provide robust financial services. Banks have fewer eligibility requirements and sometimes more specialized product offerings, but they offer less competitive rates and higher fees.

Credit unions are more selective about their members, and small ones may not offer the products you're looking for. But those who join the field of membership gain access to more attractive rates and fees.

Of course, customer service is a big factor for most consumers, all other things being equal. Service depends on the overall culture of the organization in most cases, regardless of whether it's a bank or credit union. The quality of your interactions with staff may also depend on whom you’re talking to on any given day.

That said, credit unions and small banks are known for providing a more highly personalized level of customer service compared to larger banks. It may be easier for everyone to get to know each other with fewer customers and employees. There’s a good chance you’ll work with the same people each time you visit a branch.

Expect a more consistent but less personalized experience at large banks. Employees are more likely to have completed a comprehensive training program with rigid protocols for dealing with service issues, giving them little flexibility to accommodate your unique needs.

Participating credit unions also provide service at shared branches, allowing you to visit the branches of other participating credit unions nationwide. You can make deposits and withdrawals at those branches, as well as transfers and payments, but you may need to work with your local credit union on more complex issues.

The Bottom Line

The decision comes down to the products if ownership isn't important to you, as well as the rates and fees you're looking for. You can maintain separate accounts at both banks and credit unions to avail the benefits of both.

Take steps to avoid problems when you move your money if you decide to switch to a different bank or credit union. Use a checklist for switching banks to make the process as painless as possible.