Credit unions and banks offer a similar experience but operate from a very different structure and philosophy. One is not necessarily better than the other, but one may be better for you, depending on your values and your needs. Which one makes the most sense for you? To determine that, here is a list of questions you can ask, and some answers to help you consider the options.
HOW ARE CREDIT UNIONS AND BANKS STRUCTURED?
Credit unions are cooperative financial institutions that are co-owned by their members. Members own a share of the credit union, which is generally represented by a portion of the savings in their aptly-named “share” savings account. That share gives them voting rights, enabling them to vote for new board members and potentially to vote on other important credit union matters. All members’ votes carry the same weight, regardless of how much they have in their share savings account. The board of directors is a volunteer group of elected members who serve without any type of compensation. They help guide the course of the credit union and work closely with the CEO to ensure that member needs are met.
Banks are owned by their stockholders. Stockholders own shares and the number of shares they own determines how much weight their vote has in determining the course of the bank. Stockholders receive a proportion of the bank’s net profit based on the number of shares they own.
HOW ARE EARNINGS DISTRIBUTED?
At a credit union, profits are returned to the members through lower fees and loan interest rates and higher interest rates on deposit accounts.
Stockholders at a bank receive a proportion of the institution’s profit based on the number of shares they own.
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HOW ARE THEY TAXED?
Because credit unions are member-owned and democratically controlled financial cooperatives, they qualify, and operate, as not for profit entities and are therefore exempt from federal and most state income taxes (though they still pay other taxes like payroll and property taxes). This tax exemption enables credit unions to meet the mission of serving the needs of consumers who do their banking with the credit union.
For the most part, banks pay corporate income taxes on their earnings because they operate with a mission to create profit and bring value to their outside stockholders. Some banks qualify for tax exemption, but most are taxed.
HOW DO THEIR RATES MEASURE UP?
Rates are tricky and are determined by a number of things, including the state of the economy, rates set by the Federal Reserve, the financial strategy of the institution, and more. Credit unions can often offer better rates than banks because of their status as not-for-profit entities. As noted above, revenue earned by a credit union is used to offer better rates and more affordable financial services, rather than using that revenue to pay outside stockholders. That said, some online-only banks may be able to provide better rates because they don’t have the expenses of “brick and mortar” branches throughout a defined geographic area.
DO BOTH CHARGE THE SAME IN FEES?
You are likely to experience lower fees at a credit union than at a bank. Because banks need to show a profit for their stockholders, they often charge fees for a larger range of accounts (checking, credit card, etc.) and errors (overdrafts, bounced checks, etc.).
DO THEY BOTH GUARANTEE MY DEPOSITS ARE INSURED?
Both credit unions and banks insure their funds. Federal credit unions insure up to $250,000 through the National Credit Union Administration (NCUA), which is backed by the federal government. Similarly, banks insure up to $250,000 through the Federal Deposit Insurance Corporation (FDIC), another federally-backed entity.
IS THE SERVICE THE SAME?
The service at your financial institution will largely depend on the leadership within the organization so it is highly variable. That said, credit unions are known for their philosophy of “people helping people.” Because they are generally smaller and more community-oriented than larger banks, they can often provide better services to those who have lower credit scores or other financial challenges. They can get to know their members (who are also credit union owners) and base their lending decisions on the person’s full financial and personal picture rather than numbers on a spreadsheet. Smaller community banks often behave very much like credit unions when it comes to service but larger national or international banks may not be able or willing to offer such personalized service.
DO THEY BOTH OFFER ALL THE BANKING PRODUCTS I NEED?
Credit unions and banks offer the same general essential products. There may be some variation in the names of their accounts and some diversity in their offerings, but for the most part, you can expect to find a basic range of savings accounts and loan products and technology wherever you decide to bank.
HOW DO THEIR DIGITAL BANKING AND APPS COMPARE?
Credit unions have historically been known for their face-to-face and personalized service. Over the past decade, however, credit unions have recognized the importance of offering state-of-the-art mobile apps and digital technology so that members can have a similar experience to big banks, who have had the greater financial capacity to develop these services. Today, most credit unions are tech and mobile-savvy as a result of big investments made over the past decade.
AND WHAT ABOUT BRANCHES?
At one time, credit unions tended to have fewer branches, with most of them located within a small local region. Over the past years, credit unions have been expanding the number of branches they have, and banks have been decreasing the number of branches they have.
Much of this is determined by growth, changes in strategies, or by financial institutions merging, which happens both in the bank and credit union world.
One benefit of using a credit union is that, in the cooperative spirit, credit unions have created a Shared Branch Network that allows people to visit other credit union branches that may not even by their credit union. The Shared Branch Network allows people to do their banking across the country, to do their banking. The same is true when it comes to ATMs—credit unions can also offer ATM access to members anywhere via a nationwide cooperative ATM network.
Banks tend to have branches and ATMs throughout their home state or region. If they’re large enough, they may offer branches across the country and, potentially, in other countries.
WHICH MAKES THE MOST SENSE FOR YOU?
The only person who can decide whether you should go with a credit union or a bank is you. Keep researching and talk to representatives of financial institutions in your area. It’s your money and you’ve worked hard to earn it. You should make sure you feel comfortable with the institution that protects it.
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