What Is the Difference Between Banks and Credit Unions?From interest rates to loans, find out how banks and credit unions differ.

On the surface, banks and credit unions seem very similar. After all, they both offer many ways for people to save and borrow money through loans, checking accounts, savings accounts, certificates of deposit and more.

But, the truth is that these two types of financial institutions differ in many ways. Whereas banks have been around for hundreds of years, dating back to the Roman Empire and beyond, credit unions are relatively new entities in comparison. Dating back more than 100 years to 19th century Germany, credit unions were created to provide financial services to people in the community who couldn’t get financing from a bank.

Now, there are roughly more than 6,000* banks and an almost equal number of credit unions in the U.S. With so many financial institutions to choose from, deciding between joining a bank or a credit union can be difficult. But before you make any decisions, here’s everything you need to know about the difference between a credit union and bank.

Related: Best Banks of 2016

Infographic: Difference Between Credit Union and Bank

difference between credit union and bank

Difference Between Credit Union and Bank: 6 Key Points

1. Business Structure

Banks: A bank’s business structure is the same as a company’s business structure: They work to make money. Banks are for-profit institutions that are controlled by a board and stockholders, meaning their purpose is to make a profit for shareholders. When you put your money in a bank, the bank will lend it to other people and businesses. But this isn’t charity; banks receive payments in the form of interest from those who borrow money. And in return, banks will also pay interest to its customers for choosing to put their money in a bank.

Credit Unions: Credit unions differ greatly from banks when it comes to their mission. They’re not-for-profit organizations with the goal of serving its members versus earning money. And, they’re not controlled by shareholders; they’re partly owned by its members, which is why their “customers” are referred to as “member-owners” instead. Member-owners get a say in how the credit union is operated.

But just because they’re not-for-profit, that doesn’t mean credit unions they’re not interested in making money. Credit unions also make money, and they share those profits with their members via better rates and low fees.

2. Tax Structure

Banks: Most banks are taxed on the entity level. As a result, “customers pay lower taxes than they would if they did busienss at the credit union instead,” reports Forbes. But about one-third of banks are organized S-corporations, which means they don’t pay a federal corporate tax, according to the Wall Street Journal.

Credit Unions: According to Forbes, credit unions “don’t face taxation at the entity level” because they are not-for-profit entities. But that means they have to pass down their earnings to credit union members in the form of interest. Credit union members then have to report that interest to the IRS on their tax return. “Credit unions don’t pay taxes at the entity level because their customers end up doing that for them,” states Forbes.

3. Eligibility

Banks: Visit any bank in person — or go to its website — and you’ll find it’s pretty easy to become a bank customer: Choose the banking product you want, hit “Apply” and fill out an application.

Credit Unions: According to the MyCreditUnion.gov, a credit union’s board of directors usually decide who can become a member. Eligibility requirements vary by credit union, but in general, membership eligibility depends on residence and community, employment and membership in other associations and organizations. For example, Navy Federal Credit Union is a popular credit union for military members. In order to become a member, you must be affiliated in some way with the U.S. military.

4. Products and Services

Banks: Depending on the bank’s size, you can expect to find a wide variety of products at your traditional bank: savings accounts, checking accounts, CDs, auto loans, mortgage loans, credit cards and more. Some banks even offer business banking products, investment vehicles (such as retirement accounts) and college savings plans.

Some online banks, however, might have limited offerings. For example, online bank Synchrony Bank doesn’t offer checking accounts or loans — it only offers CDs, money market accounts, savings account and IRAs.

Credit Unions: Credit unions tend to offer the same basic financial products and services — checking accounts, savings accounts, credit cards, loans and more — as banks. However, smaller credit unions might only have a few financial products.

Both banks and credit unions tend to offer digital banking services as well, such as online banking, mobile banking and remote check deposit. The only real difference between a credit union and bank when it comes to products and services? Rates and fees.

Related: 5 Things You Should Expect From a Good Bank

5. Rates and Fees

Banks: Because banks have to make a profit for their shareholders, they tend to have higher bank rates. This includes higher interest rates on loans and credit cards, lower deposit rates and more fees.

Credit Unions: Credit union rates tend to be higher on deposit accounts. And, credit unions tend to have lower interest rates on loans and credit cards, as well as fewer fees.

The only exception is perhaps online banks. Unlike traditional brick-and-mortar banks, online banks are able to offer competitive rates and fewer fees due to their lack of overhead and labor costs. As a result, those savings are passed to customers in the form of higher yields, lower loan costs and smaller fees.

6. Deposit Insurance

Wherever you decide to deposit your money, you’ll want to make sure that your money is protected in case anything happens to the financial institution. Fortunately, most banks and credit unions are federally insured by the government, either through the Federal Deposit Insurance Corporation (FDIC) or the National Credit Union Administration (NCUA).

Banks: The FDIC insures bank deposit accounts up to $250,000 per owner. These accounts include single bank accounts, joint accounts, certain retirement accounts and more.

Credit Unions: Federal credit unions, on the other hand, are insured by the NCUA through its National Credit Union Share Insurance Fund (NCUSIF). Like the FDIC, the NCUA insures individual deposit accounts up to $250,000.

Neither the FDIC nor the NCUA insure annuities, mutual funds, stocks, bonds and other investments.

Should You Join a Credit Union or Bank?

Now that you know the key differences between credit unions and banks, it’s time to pick one. And if you’re already a bank customer or a credit union member, perhaps it’s time to switch institutions.

Products and Services Available

Winner: Banks

Although banks and credit unions tend to offer the same products and services, you’ll likely find that bigger institutions might offer more products and services, such as investment and brokerage products. That’s especially true for larger, national banks. Smaller banks and credit unions tend to offer a smaller number of services and products.

ATMs and Branches

Winner: Banks

If you’d rather do your banking in person, you might want to go with a bank instead of a credit union. Why? Because there’s a good chance that your credit union might only have a handful of branches. A bank, especially a national bank, will have dozens of branches throughout the country, making it easier for you to conduct your financial transactions no matter where you are.

When it comes to ATMs, banking with a national bank will likely provide you with more access as well. Because banks tend to have more ATMs nationwide, there’s a lower chance of you incurring ATM out-of-network fees. But, many credit unions are connected to large ATM networks, which makes it easier to avoid out-of-network ATM fees as well. Plus, many credit unions — as well as some online bank — offer ATM fee reimbursements.

Customer Service

Winner: Credit Unions

Without a doubt, you’ll experience better customer service at a credit union than a bank. Since credit unions tend to be smaller than banks, you’ll have an easier time speaking with a real-life person rather than a voice recording.

Checking and Savings Account Fees

Winner: Credit Unions

In general, credit unions tend to offer fewer and lower fees all around, including savings and checking account fees. Still, a good number of banks offer free checking accounts and savings accounts.

Checking and Savings Account Interest Rates

Winner: Credit Unions

According to the latest figures from business intelligence services firm SNL Financial, the national average credit union savings account and credit union checking account rates are higher than bank rates. Take a look at the table below:

Product All Credit Unions (National Average Rate) All Banks (National Average Rate)
5-Year CD-$10K 1.49% 1.22%
1-Year CD-$10K 0.47% 0.38%
Regular Savings Account-$1K 0.13% 0.12%
Money Market Account-$2.5K 0.16% 0.12%
Interest Checking Account-$5K 0.10% 0.09%

Clearly, it pays more to choose a credit union over a bank when it comes to deposit accounts such as savings accounts, money market accounts, interest checking accounts and CDs or certificates.

Auto Loan Rates and Mortgage Loan Rates

Winner: Credit Unions

When it comes to car loan rates and home interest rates, it’s almost always cheaper to get credit union loans rather than bank loans. As SNL data shows, interest rates on these loans are cheaper at credit unions — except for 30-year fixed-rate mortgages:

Product All Credit Unions (National Average Rate) All Banks (National Average Rate)
30-Year Fixed-Rate Mortgage 4.08% 4.06%
15-Year Fixed-Rate Mortgage 3.36% 3.36%
5/1 Year Adjustable Rate Mortgage 3.30% 3.54%
3/1 Year Adjustable Rate Mortgage 3.14% 3.45%
Used Car Loan-48 months 2.78% 5.16%
Used Car Loan-36 months 2.66% 5.11%
New Car Loan-60 months 2.70% 4.72%
New Car Loan-48 months 2.58% 4.62%

Credit Card Rates

Winner: Credit Unions

If you’re a big spender who loves to swipe credit cards for purchases, make sure your credit card has the lowest interest rate possible. According to data from SNL, the average credit card interest rate at credit unions is 11.61% versus 12.59% at banks. In that case, it makes sense to choose credit union credit cards over bank credit cards.

Keep Reading: 10 Best Credit Unions Anyone Can Join

Now that you know the difference between banks and credit unions, you might think credit unions are the obvious choice when it comes to picking somewhere to park your money. Although credit unions seem to make the most sense financially, don’t count out all banks. Smaller banks and online banks also offer competitive rates and fewer fees, so research a few before making your choice. And also remember that accessibility is important; you want to be able to access your money whenever you want and wherever you are. If that’s your biggest concern, then a national bank might be your best option.

*Number of banks is based on 1/7/16 figures from the FDIC. Number of credit unions is based on most recent figures from the NCUA.

  • Ken O’Connor

    Nice Write up Kristen. CU’s are a great option for many in the US!

    • Kristen Christian

      Thanks, Ken! They really are.

  • Shelly

    Credit Unions seem to have better service and care about their customers — but why don’t they market themselves better?

    • Kristen Christian

      That’s a very good question, and something I’ve been working to improve over the past couple of years. I personally think that some of the best approach is for credit unions to embrace an organic social strategy in which they serve their communities in a way that will encourage members to tell their family, friends and neighbors about the benefits of banking with a financial co-operative.

  • Jan

    Excellent article.

    • Kristen Christian

      Thank you, Jan! I’m glad you enjoyed it.

  • Stephen

    Why wouldnt America legislate a banking system that immolates credit unions? It would seem like an advancement to Money & Banking.

    • Kristen Christian

      That’s a very good question, Stephen. I agree wholeheartedly that a not-for-profit banking system would be of great benefit to the American people. Until the time comes when our legislators make that a reality, consumers are fortunate to have financial cooperatives to assist with their banking needs.

  • Annie August

    I honestly prefer a credit union over big banks. For me, a credit union is a lot easier to deal with compared to banks and the folks at Oak Trust in Plainfield, Illinois just make the experience even better. Check out their site at http://www.oaktrust.com