It is probably safe to say that just about everyone knows what a bank is and how it operates. It is probably also a safe assumption that most people have at least heard about credit unions, as well. The fact is though, that many people do not know the difference between a bank and a credit union and may even assume they are the same. While they are very similar, there are some major differences between the two.
In addition, there seems to be a ton of misconceptions about credit unions, so it is important to know the benefits and downfalls of each to help you determine which works best for your financial needs.
Banks and Credit Unions by Definition
- Credit Union – A credit union is a financial institution that is similar to a bank, except that it is considered to be a co-operative, which means that it is owned by the members. Members of the credit union buy shares in the co-operative, which is then used to fund loans and services for the members. These nonprofit financial institutions have the main goal of serving members versus earning a profit. These member-owned financial institutions typically yield better returns on savings, offer lower interest rates on loans, and have reduced fees for member services. You must join the credit union to use its services, which involves passing certain member requirements.
- Bank – A bank is a financial institution that is licensed, regulated, and insured by the federal government and given permission to accept deposits and fund loans. A bank offers a variety of financial-oriented services for clients such as checking and savings accounts, safe deposit boxes, credit cards, wealth management, and more. There are a variety of different types of banks to meet the needs of consumers and businesses including, commercial, corporate, and retail banks. Anyone can open a bank account, as long as they meet the bank’s requirements. Unlike credit unions, banks are a business with the goal of earning a profit, with the owners being their shareholders.
When choosing the best financial institution, here are some pros and cons of banks and credit unions to consider.
Pros and Cons of Banks and Credit Unions
Pros of Credit Unions:
- Lower interest rates and high savings rates
- Strong customer service for members
- Low to no-fee services and accounts for members
Pros of Banks:
- Customers have access to a wide range of banking, loan, and retirement financial products
- Large banks are convenient and offer easy access via multiple branch locations and ATMs
- Superior state of the art online banking technology
Cons of Credit Unions:
- Less financial product offerings
- Branches are far apart and few between
- Low-tech online banking with minimal features
Cons of Banks:
- Potentially higher interest rates on loans
- Less emphasis on customer service for clients
- High fee services like checking and savings accounts
The choice between a bank and a credit union is different for everyone depending on their unique situation. Weighing the pros and cons that comes with each financial institution is the best way to determine which is the best fit for your financial situation.