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Credit Union vs. Banks: What’s the Difference?

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The fundamental difference between a bank and a credit union is that banks have shareholders and operate to make a profit as the primary goal. Credit unions are not-for-profit financial institutions. With this model, each account holder — also known as a credit union member — essentially “owns” a stake in the credit union.

While banks pass profits on to shareholders, credit unions reinvest profit into the credit union — often in the form of lower rates and fewer fees. Banks and credit unions each have pros and cons, and choosing a financial institution is a personal decision so it’s important to know the benefits and drawbacks of both.

Here’s what consumers need to know before choosing one.

Which Is Safer, Credit Unions or Banks?

Both types of financial institutions are equally safe. From small local credit unions and banks to those that operate worldwide, the federal government insures each one.

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What Is the FDIC?

The Federal Deposit Insurance Corporation is a federally run government agency. It insures up to $250,000 per person, per approved bank.

What Is the NCUA?

The National Credit Union Administration is also a federally run government agency. It offers the same protection for credit union members that the FDIC offers to banks — $250,000 per person, per approved credit union.

Did You Know?

If you have deposits with at different financial institutions totaling up to $250,000, each one is insured separately. When depositing more than $250,000 into a single bank or credit union, the amount over $250,000 is not guaranteed if a financial institution runs out of money or fails. Insurance typically only covers one of each type of approved account.

Are Interest Rates on Loans Lower at Banks or Credit Unions?

Plenty of factors go into the individual rate a person receives on a credit card or loan. Generally speaking, consumers can expect lower interest rates on loans at credit unions.

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In June 2021, the average rate for a 60-month new car loan was 2.87% at credit unions and 4.78% at banks. While a difference of less than 2% may not seem like much, it could save hundreds to thousands of dollars in interest over the life of a loan.

Mortgage rates are more comparable between banks and credit unions. The difference in rates for a 30-year fixed-rate mortgage was a single basis point in June 2021. The average credit union rate was 3.14%, while the average rate at a bank was 3.15%.

In general, credit unions offer slightly higher interest rates on deposit accounts. The national average annual percentage rate on 12-month certificates of deposit from credit unions is 1.32%, which is a 35-basis point improvement over the national bank average.

Are Earnings on Deposits Higher at Banks or Credit Unions? 

Credit unions also consistently offer higher annual percentage yields on deposit accounts like savings accounts, certificates of deposits and money market accounts.

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In June 2021, the average five-year CD with a $10,000 balance earned 0.74% at credit unions and 0.61% at banks. This may not seem like much, but the difference adds up over a lifetime.

What Are the Disadvantages of Credit Unions?

There are pros and cons to everything, and credit unions are no exception to this rule.

Membership Requirements at Credit Unions

Credit unions began as a way for small groups of people to collaborate and manage their money together without the need for a big bank. As the credit union model evolves, the idea of exclusivity remains.

Credit unions have membership eligibility requirements. Some are broad and simply require you to live in a particular region of the country, but others are limited to a place of employment or membership with an organization

Competitive Rates

The rise of online banks challenges the idea that credit unions offer the lowest rates. Banks that operate 100% online with no physical branches don’t have as much overhead. This means that they can offer lower rates and still turn a significant profit for shareholders.

Mobile Banking and Credit Unions

There’s a misconception that small credit unions don’t offer resources like online and mobile banking, but this isn’t true. Even if the offerings are not as robust as big banks, most credit unions offer some form of online and mobile banking.

How To Choose a Bank or Credit Union

While all financial institutions offer similar banking services, each one is unique. Before choosing a bank or credit union, think about what you need most from your financial institution.

If managing all of your financial transactions with a single institution is important, consider factors like:

Good To Know

Banks and credit unions often participate in ATM networks with other financial institutions, making it easy to access money while on the go without paying a fee if your institution does not have one nearby.

Final Take

Choosing a bank or credit union is a decision that affects all aspects of a person’s financial life. After understanding the basic differences between banks and credit unions, consumers should research individual financial institutions to choose the best fit for their personal needs.

Sydney Champion contributed to the reporting for this article.