What’s the Difference Between a Bank and a Credit Union?

Do you have a friend or family member who belongs to a credit union?  Have you wondered whether a bank or a credit union is best for your financial needs?  And just what is the difference?  They both have savings and checking accounts.  Is there any difference?  The short answer is yes, there is a difference.

But first let’s look at the similarities.

  • Both banks and credit unions operate under federal or state charters and they are subject to the regulations of those charters.
  • Both are insured by federal agencies for the first $250,000 of your deposits (sometimes more) in the event of bank or credit union failure.  Banks are insured by Federal Deposit Insurance Corp. (FDIC) and credit unions are insured by National Credit Union Share Insurance Fund (NCUSIF) which is administered by the NCUA, an independent government agency.
  • Both provide similar services, checking and saving accounts, loans, etc.

But that’s where the similarities end

The main difference is that banks are businesses run “for profit” and for the benefit of the bank.  Credit unions are “not for profit” and run for the benefit of their members.  That’s an important difference.

With a bank, when you put money in a savings account, you essentially loan your money to the bank.  They hold your money for you and invest it or loan it to other people to create profit for the bank.  You get some amount of interest, but the bank gets some profit from your money too.  Anyone can use a bank and its services, but the bank runs their business as the bank directors and management sees fit.  Consumers have no say in the matter.

Members of a credit union usually have some common identity, such as working at the same company or living in the same geographical area.  At a credit union, your savings account money is a “share” in the company of the credit union just like owning stock in a business.  As a shareholder, you have a vote in matters concerning the running of the business, and you will earn interest on your money.  You also will get a dividend at the end of the year if there is profit left over from the management of the CU.

What this means is that you will probably get a better interest rate on your savings or checking accounts and any loans at a credit union, because the CU is being run for the shareholders benefit.  The bank is being run for the bank’s benefit.

If that sounds like an argument for using a credit union, remember that banks generally have more services available than an average credit union, including no-fee ATM’s, more types of accounts, trust services, excellent 24/7 on-line banking services, and other more sophisticated services and technology.  As technology becomes more common and affordable, some credit unions have services that rival many banks.

So which do I choose?  A couple of questions to ask yourself.

  • Do I travel a lot and need ATM’s to access my accounts?  A local credit union may not provide this service for you.
  • Are my financial needs simple?  If you just need a checking account and a savings account, you will probably get better interest rates at your local credit union.

In the end, you must evaluate your own needs, and decide which works best for you.  Ask your friends and neighbors if they would recommend their own bank or credit union and what they like or don’t like about it.  There are generally credit unions available in most areas, just as there are many banks.

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