Banks vs. Credit Unions

Credit unions and banks each have unique features

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"

Image by Bailey Mariner © The Balance 2020

With a bank or credit union on nearly every block, consumers are spoiled for choice in their banking needs. But the many similarities between banks vs. credit unions might leave you wondering which is right for your needs. While both types of institutions allow you to safely deposit or borrow money for a range of uses, there are differences between the two that matter when it comes to choosing where to bank and how to handle your money.

Operation of Banks vs. Credit Unions

Both types of institutions make money by lending money at higher interest rates than they pay out on deposits, as well as through fees. The key difference between banks and credit unions is that credit unions are not-for-profit organizations owned and controlled by their customers, known as "members." The primary goal of credit unions is to promote the financial welfare of and return profits to their members.

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

Bank vs. Credit Union Eligibility

Banks are open to the general public. While regional banks operating within a certain location may limit some or all banking products to people in that location, national banks usually extend individual accounts to any legal resident aged 18 or older.

In contrast, 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." Fortunately, the requirement is relatively easy to meet. You may be eligible to join a credit union because of:

  • Where you work
  • Where you live
  • Your membership in an organization (such as a school or place of worship)
  • A family member’s eligibility

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

Bank vs. Credit Union Products

For most customers—consumers handling personal and small-business finances—the choice of a bank or a credit union won't limit the products available to you. 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

However, 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, but it never hurts to ask. Some small institutions have partnerships with service providers that allow them to provide these services to their customers.

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

Rates and Fees at Credit Unions vs. Banks

Another important distinction between these two institutional types is that credit unions tend to offer more attractive rates and fees on the whole. 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 banks must pay. As a result, they tend to offer higher interest rates on savings accounts and CDs, lower rates on loans, and lower account fees than banks. This combination of benefits 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 to maximize profits for investors. However, neither all banks nor all credit unions are the same. Some banks offer more competitive rates than credit unions. It's best to shop around before assuming a credit union will grant you the better deal.

Security of Credit Unions vs. Banks

You might wonder if it's safer to hold deposits at a bank than at a credit union. In truth, as long as the institution holds insurance, your money is generally safe at either type of institution.

The safest insurance available comes from the U.S. government.

If an institution goes under, some or all of your money may be insured, meaning lost funds will be replaced. In most cases, your account will end up at a new institution, and you'll keep the same account number and account balance as before.

Under current law, both FDIC and NCUSIF coverage protect up to $250,000 per depositor, per institution. If you have more than that amount to manage, spread your funds among different account registrations or different institutions. It's also possible to have more than $250,000 insured in one place if you have 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.

Customer Service at Credit Unions vs. Banks

The service depends, in part, on the overall culture of the organization. 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 large banks. With fewer customers and employees, it may be easier for everyone to get to know each other. There’s a good chance you’ll work with the same people each time you visit a branch, and you may develop lasting relationships. Those relationships can potentially make it easier to resolve issues with your accounts.

At large banks, expect a more consistent but less personalized experience. 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 make transfers and payments, but you may need to work with your local credit union on more complex issues.

Which Is Better: Banks or Credit Unions?

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 specialized products you seek, but those who join the field of membership gain access enjoy more attractive rates and fees.

If ownership isn't important to you, the decision comes down to the products and the rates and fees you seek at the individual institution you're looking at. And remember: You can maintain accounts at both banks and credit unions to avail the benefits of both.

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