Are Credit Unions Better Than Banks? Know the Facts Before Making the Switch

Staff Writer

Everyone knows what a bank is, but many folks have only a hazy sense about credit unions. Maybe that’s because they tend to be local, have few branches and often erect barriers to joining. What’s often left out of the equation is that credit unions are not-for-profit organizations, meaning they pay more interest on savings and charge less interest on loans. The U.S. has more than 6,000 banks and a similar number of credit unions. So the question is, should you move your bank accounts to a credit union? The answer is a resounding maybe. Here are the facts that can help you decide.

Organization

Banks are for-profit corporations that come in three sizes – national, regional and community. They exist firstly to make profits. Banks are structured much like any other type of corporation: They are owned by stockholders and are organized with a board of directors at the top, a hierarchical management structure and lots of worker bees. Anyone with a dime and a dream can become a bank customer. The bigger the bank, the more branch offices and cash machines are available to customers. Deposits are usually insured by the Federal Deposit Insurance Corporation to the tune of $250,000 per account, or if joint accounts, per co-owner. National banks run under the supervision of the Office of the Comptroller of the Currency, while state-chartered banks are regulated by their states. Most banks belong to the Federal Reserve System.

Credit unions have a different type of organization. They are mutually owned by their members, who vote on important matters and elect a board of directors made up of volunteers. Their mission is to serve their members, not generate profit. You usually must belong to some association or cause in order to join. These might include where you work, live, worship, or hug trees. You pay a one-time fee to join and have to open a small deposit account. Credit unions typically have only a few branches, which can be a definite disadvantage if you don’t happen to live near one. However, as explained below, credit unions have taken steps to address this problem. Some tiny credit unions are run from households and have no branches. Federally insured credit unions belong to the National Credit Union Share Insurance Fund, which insures depositors for at least $250,000. Federal credit unions are members of the National Credit Union Association (NCUA), whereas state-chartered credit unions are not NCUA members and offer privately-insured accounts.

Offerings

Banks and credit unions offer many of the same products and services, including:

  • Checking and savings accounts (personal and business)
  • Overdraft protection
  • Credit and debit cards
  • ATMs
  • Individual retirement accounts
  • Certificates of deposit
  • Money orders
  • Various types of loans, including mortgages, car loans, business loans and student loans
  • Online and mobile banking
  • Rewards programs, such as free withdrawals from ATMs or free traveler’s checks
  • Merchant services (i.e., credit card processing, check collection, reporting and reconciliation)
  • Holiday clubs
  • Other financial services, such as wealth management, stock brokerage services, mutual funds

Not all banks and credit unions offer all of these services, but you can see that there is almost complete overlap between the two types of institutions.

Pros and Cons

  1. Costs: Credit unions do not have to pay dividends to outside stockholders, and because they are not-for-profit, they don’t have to pay taxes. Any excess of income over expenses is plowed back into credit unions by way of better interest rates, generous reward programs and free services. Banks have to make a profit, which leaves less money left over to subsidize interest rates. Big banks might also have to contend with higher real estate and advertising costs, and they pay taxes. Finally, banks have to shell out big bucks for their boards of directors, while credit union boards are made up of unpaid volunteers. Advantage: Credit unions.
  2. Business loans: Banks are free to make business loans up to their reserve limits. Credit unions can make business loans up to only 12.25 percent of their assets. Credit unions can afford to charge less for business loans, but may not offer the full range of related business services, such as lease financing and cash management, that many banks provide. Advantage: Banks.
  3. Becoming a customer: Anyone can become a bank customer. To use a credit union, you must first become a member, which requires a one-time fee. You must have some kind of affiliation to a particular cohort, whether work-, location- or activity-related, to join. Credit unions try hard to find a way for any potential customer to join, but it’s not always possible. Advantage: Banks
  4. Access: Banks, especially big ones, have many branches in convenient locations all around town. Many customers seldom have to visit a branch, thanks to direct deposit, ATMs, online banking and mobile payment apps. Credit unions, though typically smaller, have found ways to increase access. For example, many credit unions belong to the CU Service Centers Network, which allows customers to access their accounts at the branches of participating credit unions other than their own, as well as retail store locations like 7-Eleven. Advantage: Banks
  5. Customer Service: This is a strong point for credit unions, which are known for their friendly personal service. Small banks might offer a comparable level of customer service, but most banks are large and tend towards the impersonal. Call a credit union and you’ll probably reach a human; call a bank and expect to enter the voicemail labyrinth. Advantage: Credit unions.

To sum up, credit unions offer lower rates on loans, higher rates on savings, more rewards and freebies, and superior customer service. Banks offer more convenience, a wider array of services, professional management and greater financial stability. Your choice between the two will depend on the characteristics you value the most.

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