The Difference Between A Credit Union And A Bank Explained
Content–March 25, 2020
Its a question few know the answer to, but many ponder: Whats the difference between a credit union and a bank? On the surface, both types of organizations seem to do the same thing. You give them your money and, when you need it again, they give it back.
Both credit unions and banks also offer other perks and services. You can turn to either institution when you find yourself in need of a mortgage or auto loan. You can also earn interest on any money you have tucked away in a savings account.
So, with all these similarities, what really is the difference between a credit union and a bank?
Getting A Mortgage With A Credit Union Vs A Bank
Your local credit union offers mortgages to homebuyers just like a regular bank and should have a range of mortgage terms as well as fixed and variable rate mortgages. Once again, credit unions, due to their not-for-profit organizational structure, tend to offer slightly more competitive products, and this is true of mortgage rates as well. While credit unions may have better mortgage rates than banks, there can be downsides to a mortgage with a credit union. For example, credit unions may not have as flexible prepayment terms as the banks. Make sure to get clarification before signing on the dotted line.
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Earn More Interest On Your Savings
When money is going to be tight for a while, its smart to save as much as you can in your emergency fund. You also want to make your dough the green kind rise as quickly as possible, which means getting the highest rate you can on savings, money markets, CDs and any other interest-bearing accounts.
Heres the great news: Credit unions typically pay you more interest2 on the cash you deposit with them. To give you an idea, in March 2021, you would have earned an average of .14% interest on a $2,500 money market account with a credit union, while the average bank wouldve given you just .09!1
Of course, youll still want to make a budget using a spreadsheet or app so that you actually have cash to put into that savings account!
2021 Average Interest Rates at CUs vs. Banks 1
5-year new car loan = 1.79% LOWER at a CU
That could save you over $1K in interest on a $25K car loan!
Home equity line of credit = .36% LOWER at a CU
Some Big Banks dont even offer HELOCs!
What Are The Different Types Of Credit Unions
Some credit unions are state-chartered, as opposed to federal, and are privately insured. States oversee these credit unions and their deposits are not insured by the NCUSIF.
There’s an easy way to tell if your credit union is federally insured. Its official name, which shows up on your statements and in legal documents, must include the phrase “Federal Credit Union.”
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Why Choose A Bank
While the fact that credit unions are not-for-profit and member-focused may make them sound like the clear winner compared to banks, there are a number of reasons why consumers may choose banks.
To start, banks are open to any consumer interested in a product or account, provided the consumer doesnt have a bad banking history. Credit unions are only open to members, and you may not be eligible for membership if you or a member of your household does not belong to the community served by the credit union. This makes banks an easier choice for many consumers who lack any specific affiliation with a community served by a credit union, although some credit unions do allow you to become a member simply by paying a nominal membership fee.
Banks generally have more branches and ATMs available, as compared to credit unions. This added convenience makes it easier to access your money from a bank, since you may be able to find branches and ATMs throughout your city, state and even nationwide. That said, credit unions often partner with other co-ops to provide additional branch availability and access to fee-free ATMs nationwide.
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Banking With A Credit Union Vs A Bank In Canada
The experience of using a regular bank account vs a credit union account is very similar. Both types of organizations have brick and mortar locations where you can go and do your banking. Both credit unions and banks offer chequing and savings accounts, mortgages, loans and credit products, and investment and retirement products. Depending on which credit union you choose, you may receive a higher interest rate for your savings, or have access to fewer products .
Using your credit union issued debit or credit cards is very similar to a traditional bank, and they are accepted anywhere a traditional debit or credit card might be accepted. You can withdraw cash at a credit union branch, or you can use your bank card at any credit union ATM within The Exchange Network free of charge.
Funnily enough, thereâs debate over the language credit unions can use to describe what they do. The Office of the Superintendent of Financial Institutions , Canadaâs federal banking regulator, backtracked in August after banning credit unions from using the words âbankâ, âbankerâ, or âbankingâ to explain their services. The issue is currently under review.
Lower Interest Rates On Loans Products
Overhead costs incurred by credit unions are substantially lower those of big banks because there’s no commercial ax to grind.
As a result, cost-savings are passed on to consumers through competitively priced loan products.
Even if your credit score is borderline.
The National Credit Union Administration provided the following national averages for December 2015 on loan products:
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More Cash Back Yes Please
Unlike banks, members typically receive a portion of their credit unions profits. After all, members are owners of the credit union, so its only fair that they share in its success. Credit unions return profits to their members by giving back through lower loan rates, rewards programs, annual dividends, financial education programs and more! Take a peek inside: Between 2018 and 2020, Desert Financial gave back a total of $39 million in annual cash bonuses to its members, in addition to the other rewards and benefits of membership.
How To Decide Which Is Right For You
As mentioned at the outset of this article, whether a credit union or bank is best for you depends in large part on specific factors of your financial priorities. If those priorities include lower fees, higher interest rates, better customer service, and a share of profits on institutional investments, then a for you.
Before starting an account and depositing your money with any bank or credit union, ask all the questions you need to be answered to make your decision. These may include, but are not limited to, the following:
- Fees on checking accounts
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Q4 How Can Credit Unions Help Get Prospective Homeowners Get Into The Market
While it is common for people to seek mortgage loans from traditional lenders such as the big 5 banks, credit unions are another excellent way for Canadians to get into the housing market.
Credit unions offer their members hands-on services to help them succeed and come out of the process feeling satisfied and successful.
Most people dont know that credit unions are actually among the largest lenders to homeowners in Canada!
Credit unions have currently given $131 billion in residential mortgages and recorded the lowest rate of mortgages in arrears at 0.13 percent.
How To Become A Member Of A Credit Union
People can gain membership to credit unions via their employer or employee group, church or religious affiliation, school or other community organization, or even based on their geographic area.
People can also gain membership to credit unions through a spouse or other family member who has his or her membership with a particular credit union. Other credit unions offer membership to anyone who wants to join regardless of these criteria, generally for a small membership fee.
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Private Lines Of Credit For College Students
Most credit unions partner with to offer a private line of credit to supplement college education costs. The main advantages from these private student loans are:
- Zero fees: no origination, application, or prepayment fees.
- Lower interest rates than comparable private lines of credit.
- Flexible repayment plans including school deferment.
- Loans start at $1,000.
Almost 2,000 colleges across the U.S are eligible for loans from Credit Union Student Choice. To apply you must be enrolled at least part-time in a four year degree program at a participating public or private college.
How To Find A Credit Union
Membership at credit unions generally isn’t open to the public.
To join, you must meet certain criteria or be affiliated with a particular employer, group or organization.
Some credit unions also welcome immediate family members of existing account holders with open arms.
You can locate a comprehensive listing of credit unions by state using the online directory found on MyCreditUnion.gov.
Once you’ve narrowed down your list, evaluate the following factors before making a final selection:
- Opening deposit: This amount should be between $5 and $25, according to MyCreditUnion.gov.
- Convenience: Is the nearest branch located within close proximity of your home or place of employment?
- Products: Most credit unions offer the same financial products as big banks, but some are private and operate on a significantly smaller scale.
- Rate of Return: The higher the rate of return, the better.
- Community Involvement: Do the staff really seem to have the best interests of the members at heart or are they operating similar to a for-profit financial institution?
You may have to schedule appointments at each of the branches to answer these questions, but doing so will ensure you select the credit union that best suits your financial needs.
Are you affiliated with a credit union?
If so, do you prefer their services over big banks?
Please share your thoughts in the comments below.
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When Should You Choose A Bank
- The benefits outweigh the fees. Maybe your current bank has an app you love or credit cards with rewards you’re heavily invested in. If so, you may feel that a few extra dollars in fees or a slightly lower savings account interest rate are worth the benefits.
- You want products or services your local credit unions don’t offer. Big banks typically have a wider range of products and servicesmultiple credit card programs or AI-powered robo-assistants, for example.
- Size matters. For some people, size simply inspires confidence. It’s not necessarily security or access: Credit unions are insured just like banks are. Many provide access to a nationwide network of shared branches and more than 30,000 surcharge-free ATMs. Still, some customers believe a bank that’s “too big to fail” is, in fact, less vulnerableand more likely to come out with products and technologies that entice customers to do more business.
If you prefer the smaller scale of a credit union, you might also look into community banks. These institutions are more intimate and community-focused than big banks and don’t have the membership requirement. Compare services, rates and fees to decide if this might be a good option for you.
What’s The Difference Between Banks And Credit Unions
Although banks and credit unions offer many of the same essential products and services, there are key differences. Here’s a quick take on how the two types of financial institutions stack up:
|Banks vs. Credit Unions|
|Checking, savings, credit cards, home loans, auto loans||Checking, savings, credit cards, home loans, auto loans|
|Insured up to $250,000 per account by Federal Deposit Insurance Corporation||Insured up to $250,000 per account by the National Credit Union Association|
|More likely to have a wide range of products||More likely to have free checking accounts|
|Branches and ATMs nationwide||May participate in national network of shared branches and ATMs|
are member-owned, not-for-profit financial institutions. Let’s unpack this a bit.
What’s a not-for-profit financial institution? Banks are in business to make money. Their products and services are structured to take in more money than they cost to administer. Credit unions exist for the benefit of their members. If a credit union takes in more revenue than it needs to fund operations, it returns the proceeds to its members in the form of lower interest rates and fees on loans and higher returns on savings.
Who are a credit union’s members? When you join a credit union to do your banking, you become a member and a stakeholder. You have a vote in who sits on the credit union’s board and a say in how the credit union is run.
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What Are Employer Credit Unions
Employer credit unions are available to those working in specific industries or at certain organizations or government agencies. Companies from brewer Anheuser-Busch to the grocery chain Publix have credit unions open to their employees. Other employer credit unions serve larger fields of membership.
You may have access to a credit union through work as a:
When Should You Choose A Credit Union
Here are a few of the best reasons to join a credit union:
- It has the right account or loan for you. You can try out a credit union without moving all your accounts at once. Credit unions are a great resource for low-cost home and auto loans, and many will work with you to qualify if you’re just starting out. Some credit unions also offer a carbuying service that works in tandem with their auto loan programs. Credit unions usually have good deals on checking and savings accounts as well.
- They offer financial education or special programs you can use. Financial education is part of the credit union mission. Some offer workshops on skills like budgeting or buying a home. Credit unions that serve employee groups may provide specialized helpfor example, retirement advice for government workers with pensions.
- You’re willing to shop for the right digital tools. It’s increasingly possible to find a credit union with an excellent online and mobile experience, but you may have to seek it out.
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The Value Of A Dollar
Are you the kind of person who:
- Uses coupons, whether clipped from the newspaper or downloaded onto your smart phone?
- Comparison shops before purchasing any item over $50.00?
- Researches products in Consumer Reports?
- Reads verified customer comments online?
- Roots for George Bailey, who goes up against Mr. Potter in Frank Capras Christmas classic Its a Wonderful Life?
If you answered yes to any of these questions, then youre the kind of person who should join a credit union. Youre the kind of person who knows the value of a dollar.
More than that, when you watch Its a Wonderful Life, and you root for the working people of Bedford Falls to succeed in getting out from under Mr. Potters thumb, you show yourself to be a person who has values.
If Mr. Potter, who would have turned Bedford Falls into Potterville, sounds eerily too much like the Wolf of Wall Street of our time, youre not alone. If youve been feeling like big banks take advantage of you, take a page from George Bailey and choose a credit union instead.
Is Your Money Safer In A Credit Union Or Bank
Cybersecurity is a hot topic these days, and rightfully so. You cant walk through a crowded room without meeting someone whos had their bank account hacked. Cybercrime has resulted in $1.5 trillion stolen from hard-working, everyday people.1 Thats equal to the GDP of Russia. Makes your head spinand your stomach turn with anxiety.
No worries, though. Your money is equally safe in both credit unions and banks. The federal government requires financial institutions to pay back money stolen from your account if hackers breach their website.
If your PIN or debit card is stolen and somebody takes out money or spends money from your account, there are some guidelines about how much money you get back. That amount is based on how soon you report the theft. The sooner, the better, of course. This goes for both banks and credit unions.
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