Banks vs. Credit Unions: Which One Is Better for You?

If you’re looking for a new banking solution, you may be considering credit unions versus banks. But what’s the difference? The primary difference between the two is that banks operate as for-profit businesses while credit unions operate as not-for-profit businesses in which each member is a shareholder.

This difference means that fees are typically lower at credit unions. However, large, profitable banks are able to provide a wider range of services than most credit unions. Regardless of your choice, the decision is personal. Keep reading to learn about the pros and cons of banks vs. credit unions.

Banks vs. Credit Unions: A Quick Comparison

On the surface, the difference between a credit union and a bank might be difficult to spot. Here’s a Venn diagram of how they typically compare.

Advantages vs. Disadvantages of Credit Unions

When trying to decide if a credit union might be right for you, it can help to weigh the advantages and disadvantages.

Regarding advantages, credit unions have more competitive interest rates when it comes to lending and deposit options. Additionally, fees are generally lower than those that banks charge. Credit unions are not-for-profit institutions and exempt from income tax, which means they return all excess earnings back to their members in the form of better rates and lower fees.

However, a potential disadvantage of credit unions is that you must be a member to join. Although many credit unions make it easy to join, there are some that have very restrictive requirements, such as American Airlines Credit Union, which only opens its doors to those who work in the air transportation industry and their family members. Additionally, to join a credit union, you’ll usually have to pay a membership fee of $5 to $25.

Lastly, two notable disadvantages of credit unions are that they may have fewer locations and offer fewer services and products than big banks.

Advantages vs. Disadvantages of Banks

Here are the advantages and disadvantages of banks to consider.

Banks typically have better technology and innovation than credit unions, which results from their for-profit status and the money that they often have to spend on such improvements. More branches, more product offerings and more ATMs are also advantages of banks over credit unions. Plus, banks don’t require you to meet membership requirements to open an account.

Disadvantages of banks include higher loan rates, lower deposit rates and higher fees. Banks sometimes do not match the level of personalized service that credit unions do.

Are Credit Unions Safer Than Banks?

Whether you decide to work with a multinational banking institution or a small local credit union, your money is equally safe. That’s because the federal government insures them both through different organizations. The FDIC insures bank accounts, while the NCUA insures credit union accounts.

FDIC vs. NCUA

From a consumer’s viewpoint, there are no discernible differences between the FDIC and the NCUA. The Federal Deposit Insurance Corp. and National Credit Union Administration are both federally operated government agencies and offer insurance on $250,000 in deposits per person, per account ownership category, and per registered bank or credit union.

Both also insure more than $250,000 in deposits, if you spread those deposits across multiple banks. If you have more than $250,000 to deposit, be sure to split your deposit between multiple institutions to ensure coverage on your entire balance.

Do Banks or Credit Unions Charge Lower Interest Rates on Loans?

You can usually expect a lower interest rate at credit unions than at banks — but because there are multiple factors that determine your rate, your personal experience may differ from the norm.

Bank Loan Rates

Banks are for-profit businesses, meaning they earn profits by charging consumers fees and interest on loans. They also typically pay lower rates on deposit accounts, earning a high margin when they use money held in these accounts as backing for loans.

Credit Union Loan Rates

Because credit unions are not-for-profit financial institutions that typically funnel their earnings back to account holders, they offer lower interest rates and fees on loans and higher returns on deposit accounts.

Do Banks or Credit Unions Offer Better Interest Rates on Deposit Accounts?

Credit unions usually offer higher return rates on deposit accounts than brick-and-mortar banks. This is part of the return of value the not-for-profit credit union business model offers to members.

Online Banks

However, you may not get the best rates at credit unions. Online banks with far less overhead than traditional financial institutions often offer high-yield savings accounts. Some of these accounts offer interest rates as high as 5% or higher.

If you are interested in tapping into the highest rates for deposit accounts, it’s a good idea to shop around. Depending on your situation, you might find better rates available through either a credit union or a bank.

What Are the Downsides of a Bank?

Every financial institution has some pros and cons. Below is a closer look at the disadvantages of a bank.

Higher Fees

Most banks come with more fees involved than credit unions. For example, you are more likely to run into a monthly maintenance fee or minimum balance requirement with a traditional bank. Although many banks offer a way to waive monthly fees, it’s still important to keep these fees in mind.

Lower Savings Rates

Most of the large banks don’t offer competitive savings rates. One reason for this lack of attractive rates might be due to the higher overhead costs big banks incur by keeping a network of physical locations up and running.

It’s worth noting that some online banks offer the most competitive rates on the market. If you want to snag the best rate, it’s critical to shop around.

What Are the Downsides of a Credit Union?

After reading everything above, you may be thinking that credit unions are the better option over banks. Although credit unions do usually offer lower interest rates and fees on loans and higher returns on deposit accounts, they may not always be the best option for every scenario.

Credit unions may come with strict membership requirements, and — contrary to popular belief — they don’t always have the best rates. Moreover, they may not even offer the level of service you’re looking for.

Credit Unions Have Membership Requirements

Credit unions typically support a specific demographic of people. So, you may have to meet membership requirements to sign up.

For example, some credit unions are geared toward serving members of the military, so you or someone in your family has to be on active duty, work for the military in another capacity or meet other potential eligibility requirements. Other credit unions require you to live in a certain area or work in a specific industry. If you don’t meet the specific criteria for membership, you won’t be able to join some credit unions.

Credit Unions May Not Have the Best Rates

As mentioned above, credit unions typically offer lower rates on loans and higher rates on deposit accounts than traditional banks. However, modern online banks with high-yield savings accounts may offer better rates on deposit accounts.

Credit Unions May Not Offer the Services You Want

Credit unions may offer better rates than traditional banks, but they’re often limited in the services they provide. Some have limited customer service availability or offer a limited selection of loans. You’ll find a greater variety of credit cards through bigger banks, as well.

Sometimes you really do get what you pay for, even in banking. If you want to manage all of your banking needs in a single spot, many credit unions are unable to fit your needs.

How To Choose a Bank or Credit Union

Here are a few things to consider when you compare credit unions versus banks:

• Service availability: If you’re looking for a particular service — a certain checking account or the best CD rates — or know you’ll need it in the future, make sure the bank or credit union you’re interested in offers it.

• Branch locations: If you are interested in conducting your banking needs in person, explore the branches offered by the credit union or bank before moving forward. Many traditional banks offer a larger network of branches. But some credit unions are part of the Co-op network, which gives certain credit union members access to over 6,000 shared branch locations across the country.

• Technology: Credit unions invest their profits back into their members. That means they may not have the best technology or offer the most convenient banking experience.

• Fees and returns: If you’re willing to give up state-of-the-art technology to pay less on loans and earn more on deposits, credit unions may be your best choice.

Final Take

Banks and credit unions both have their place in today’s financial ecosystem. Banks often offer services credit unions don’t, while credit unions keep costs low. Consider the pros and cons of each when trying to determine which is best for your financial situation.

FAQ

Here are the answers to commonly asked questions about how credit unions and banks compare.

• Are credit unions better than banks?

  • If you're looking for in-person service and better interest rates, consider a credit union. However, if you're looking for a better online and mobile experience and a greater variety of services, you might be better off with a bigger bank. Ultimately, which is better for you depends on your unique needs. Consider the pros and cons of each option and how they relate to your situation before you make your decision.

• What are three differences between a bank and a credit union?

  • The three biggest differences between banks and credit unions are as follows:

    • Banks are for-profit businesses, and credit unions are not-for-profit businesses.

    • Credit unions typically charge less interest on loans and offer higher interest rates on deposit accounts.

    • Banks often offer a greater variety of services than credit unions.

  • Note that aside from being for-profit or not-for-profit, there are exceptions to these rules.

• Is your money safer in a bank or credit union?

  • Both banks and credit unions can offer insurance on deposit products. FDIC-insured banks can protect your funds for up to $250,000 per account holder, per account ownership category. NCUA-insured credit unions can also protect your funds for up to $250,000 per account holder, per account ownership category.

Cynthia Measom and Sarah Sharkey contributed to the reporting for this article.

This article originally appeared on GOBankingRates.com: Banks vs. Credit Unions: Which One Is Better for You?