Banks and credit unions have long been the preferred way for countless people to save money, purchase a home or take out a personal loan. And while both types of institutions provide customers with similar services, there are differences between the two whether it’s their mission or the interest rates they charge on their savings and loan products.
For some, banks will be the better option while for others its credit unions all the way. But before you can choose you have to understand what types of services you can expect and the differences between banks and credit union.
“It’s most important for anybody of any generation to choose a financial institution based on their specific needs and priorities,” says NerdWallet’s Banking Expert, Devan Goldstein. “For some people, the online banks’ friendly ATM-fee structures may be most important, while others may strongly value the community orientation of a small, local credit union.”
What are the differences between banks and credit unions?
Traditional banks: These are for-profit financial institutions that are licensed by the government to receive deposits and make loans. Banks also offer other services like online banking, wealth management and retirement planning. Traditional banks differ from online banks because they have a physical presence in addition to an online presence.
Credit unions: Non-profit organizations that are created solely to provide banking services to their members. They act like banks but are member owned and profits are shared among all of the members.
Online banks: Internet-based banks that don’t have a physical presence and as a result, the cost to operate the financial institution is a lot lower. That lower cost is passed on to customers in the form of higher interest rates on savings accounts. These banks team with ATM network operators to give customers’ access to ATMs and tend to charge lower fees than traditional banks and credit unions.
Key terms for banks and credit unions
Regardless if you choose to go with a bank or a credit union, the personal finance terms and financial products listed below are generally now standard across the board:
Checking accounts: These are a staple of both banks and credit unions and allow customers to withdraw against their account to make payments to vendors. Lots of financial institutions offer free or low-cost checking accounts.
Savings accounts: These financial instruments give savers an incentive for putting away money in the bank or credit union in the form of interest.
Money market accounts: These accounts function similar to a savings account but the difference is that users have some limited ability to either write checks or use a debit card with the account.
Interest rate: Both banks and credit unions have money to lend and are more than willing to do it for customers. But for accessing the cash, customers have to pay a fee in the form of an interest rate. Interest rate is expressed as a percentage of the principal and is the amount the lender charges.
ATM network: Banks and credit unions issue debit cards with their checking and savings products, enabling customers to pull up to a bank-branded ATM and conduct transactions for free.
Mortgages, loans & wealth management: In this era of one-stop shopping lots of banks and credit unions offer customers a slew of non-banking products whether it’s a mortgage, a secured or unsecured personal loan or help with investing or retirement planning. Lots of the financial institutions will offer different term home loans as well as personal loans that are backed by collateral and those that are not.
Mobile and Internet banking: Long gone are the days when customers balked at conducting transactions online. Now it’s expected both on the Internet and on a mobile phone. With these services, customers can check bank balances, make payments, transfer money and increasingly pay friends and family in real time instead of going into a branch.
FDIC insurance: The Federal Deposit Insurance Corp. was established in 1933 and ever since then it has been protecting consumer’s money up to $250,000 in the event a bank goes under. The insurance covers checking, savings accounts and certificates of deposit or CDs.
NCUA insurance: Credit unions are also federally insured to protect consumers through the National Credit Union Administration (NCUA). Each member-owner is insured $250,000 for each account ownership category. The $250,000 standard became permanent as a result of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Plus, there are options available for additional insurance coverage for a range of accounts held by a member-owner.
What are the benefits of a credit union?
Banks and credit unions have long been at odds but when it comes to the basic services they each offer the lines are getting blurred. That’s not to say there aren’t key difference between the two, it just a little less than years past.
Member-owned non-profits: Because credit unions are member-owned non-profits, they don’t have shareholders to answer to like their banking counterparts, which means they don’t have to focus so much on the bottom line. As a result credit unions can pass on revenue in the form of lower rates on their loan products and higher rates on savings accounts. Banks try to compete, but traditionally credit unions tend to do better in on rates because of their non-profit mission.
“By and large credit unions do tend to have more competitive rates on deposits as well as loans,” says Greg McBride, CFA, chief financial analyst at Bankrate.com. “Who should be attracted to credit unions is anyone who is price sensitive and cares about making sure they are getting the best deal.”
Better interest rates: One of the biggest differences between banks and credit unions come in the form of interest rates whether it’s the amount you’ll earn from a savings account or how much you’ll pay for a loan product.
Lower fees: But it’s not only interest rates where credit unions tend to do better. They often offer lower overdraft fees and Bankrate found in its 2016 Bankrate Credit Union Checking Survey that 76 percent of credit unions surveyed had no minimum balance requirement to get out of paying fees.
Mandi Woodruff, executive editor of MagnifyMoney.com, adds:
Credit unions beat banks in terms of access to low- and no-fee checking accounts, which is what most young adults need.
What are the benefits of a bank?
Go into nearly any city and chances are you are going to see a Chase or Bank of America ATM on every block. That can’t be said of credit unions and it’s even worse if you live in suburban or more rural areas.
More ATMs and branches: While credit unions can offer better rates, one of the big knocks is they don’t have a large ATM network or branches that make it easier for customers. It’s particularly true for millennials who bristle at paying an ATM fee at a non-bank location or don’t want to drive miles to find a branch.
“Banks often have a lot more choices as far as convenience,” says John Hall, a spokesman for the American Bankers Association. “Whether it’s branches or ATM networks or breadth of products, they are often a one-stop shop for financial services.”
Online banks often have partnerships with large ATM networks that allow users to use ATMs without being charged any fees. Depending on the bank, this can be a national network, or even extend to international ATMs. However, if you have a question or problem with an online-only account, you’re going to have to resolve it over the phone or online via email or chat. This can be more convenient for some people, but inconvenient for others especially depending on the type of question and/or urgency of a problem.
More technology: What’s more, Hall said banks are quicker to embrace and roll out new technology for their customers and are partnering with financial technology start-ups to provide their younger customers with what they have come to expect from their financial institution. “A lot of the fintech services that are appealing to millennials are not the type of thing you will find at a lot of credit unions or smaller community banks,” adds McBride of Bankrate.
“It tends to happen at large banks and trickle down to smaller banks and credit unions.” The credit unions, aware that technology is a big part of the value proposition for millennials, are trying to up their game by joining ATM branches and turning to third parties to give them the technology and mobile apps, says Goldstein of NerdWallet. Goldstein adds that:
A lot of the fintech services that are appealing to millennials are not the type of thing you will find at a lot of credit unions or smaller community banks
Open to more customers: Unlike banks, which anyone can walk into and open account, with credit unions you have to be a member of a particular group, community or employer to bank there. For example, some credit unions restrict membership to very specific groups of people, for example, the State Employees Credit Union of North Carolina, whereas others offer services to a broader range. For example, Truliant Federal Credit Union is open to people who live or work in North Carolina, South Carolina, or Virginia.
More customer brand awareness: The rules for membership have gotten a lot more lax in recent years, but there’s also the problem of building awareness among millennials and younger generations who don’t even know these institutions exist. “Credit unions aren’t plastering billboards over town and are not buying commercial time, nor do they have massive marketing budgets that banks have,” says McBride.
Lower fees with online banks: “But if you’re looking for affordable and easy checking and savings accounts today, the real best option today isn’t credit unions or banks — it’s online banks.” According to Woodruff, on average, banks charge monthly fees of $14, while credit unions are charging an average of $6 a month and online banks an average of $3 in fees.
Is a bank or credit union better for you?
For banking customers who care only about interest rates and like the community feel, then a credit union is going to be more appealing than a bank. According to Gene Pranger, founder and chief executive of Financial Town, which provides video banking and other technologies, credit unions tend to be a little bit more community minded and very customer centric.
He says for millennials just starting out the services offered by credit unions are going to meet most of their needs at, oftentimes, cheaper rates. But if you have a more complex financial picture, plan on starting a business or want access to unique investment products then a bank may be the better option, says Pranger.
“There is absolutely room for both banks and credit unions. Financial institutions of all shapes and sizes confer different benefits for consumers,” notes Goldstein of NerdWallet. “For some people, that’s going to be an online bank with no branches but great rates and ATM plans. For others, it’ll be a credit union or community bank with a single branch around the corner. For still others, it’s going to be a huge national bank with thousands of branches and five different checking products.”