This post is by our regular contributor, Erin.
Have you ever paused to consider what kind of bank you’re doing business with?
Or have you just gone with the one your parents signed you up with, or the one that was closest to your home?
A lot of people don’t think too much about the bank they choose, but it can affect a lot of things – the fees you pay, the interest rates you’re eligible for on loans, and how much you can earn on your money.
You might be aware that credit unions are often touted as the better, friendlier solution. They tend to offer personal customer service in a way larger banks don’t. But does that automatically make them better? And how exactly do credit unions differ from banks?
Let’s find out.
How Credit Unions Differ From Banks
First, credit unions are not-for-profit, whereas banks are for-profit. What that means is credit unions exist to serve its customers, and banks exist to serve its shareholders.
When you’re a member of a credit union, you have a say in how its run. You can vote for members of the board, or elect to run yourself. You have no say in how banks are run and board members are chosen based on the amount of shares they have.
Banks are insured by the FDIC, and credit unions are insured by the NCUA – both up to $250,000.
Large banks may have a greater selection of financial products, but to them, you’re just a number. They serve so many customers, it’s unlikely tellers will remember you by name.
Rates, Fees, and Flexibility
Credit unions are able to offer higher APYs on saving and checking accounts (for whatever that’s worth, sadly), better rates on loans, and charge less fees.
Big banks typically offer a 0.01% to 0.03% APY on savings accounts and have higher interest rates on credit cards. Should we even mention the fees? Since banks are for-profit, they make tons of money off of financially irresponsible people who don’t check their accounts and incur overdraft fees.
Credit unions also have the option to join the CO-OP ATM network, which means wider ATM availability. Banks don’t share resources.
Because of the way credit unions are structured, they can offer more flexibility when it comes to loans and approvals. Banks often have stringent requirements consumers need to meet (such as a certain credit score, income, or debt-to-income ratio), and if you fail one of those qualifications, you’re not approved.
Credit unions typically review loan approvals on a case-by-case basis, or are at least open to discussing why you weren’t approved for a loan. If your credit isn’t the best, but you’ve recovered and improved your financial situation, a credit union will be more willing to work with you than a bank.
Many people choose to join credit unions because of the lower rates they offer. If you need a car loan or a personal loan, credit unions have more affordable solutions due to lower interest rates.
Technology
Credit unions may lag behind in technology. Big banks have more resources to dedicate to things like mobile apps and websites.
I used to belong to a community bank. It didn’t have an app, and it had a horrible, not very user-friendly website. It was a pain to use.
Young adults value convenience and mobile banking. If you want to bank with a credit union, look into the technology features it offers before opening an account.
Membership Requirements
Credit unions have membership eligibility requirements. Many of them require that you live or work in the specific area they service, and some require that you work for certain employers.
The upside to this is credit unions typically serve the lower and middle class, making banking services more accessible to those who need them.
In contrast, as long as you deposit the minimum required amount, you can create any account at one of the larger banks. You also don’t have to be a member of a large bank to apply for their credit cards.
Credit Card Rewards and Perks
Most of the really awesome rewards credit cards are branded by big banks. Credit unions aren’t known for their rewards programs. However, this isn’t a concern for everyone, particularly if you’re not huge on using credit cards.
Or maybe you are a credit card user, but you want a no-frills card. Credit unions are likely to offer some great solutions, as you can find APRs less than the average 15%, as well as cards with no annual fees.
Simplicity
If it wasn’t already clear, credit unions offer simple financial products that require less hoops to jump through. Many big banks offer “free” banking as long as you keep a minimum balance, complete a certain amount of transactions per month, or have a certain number of direct deposits going into the account.
Exhausted yet? Credit unions tend to have no-strings-attached accounts. Free is free. You don’t have a laundry list of stipulations to remember or worry about.
Are Credit Unions Better than Banks?
It depends on how you plan to use your bank. If you like to keep it simple, value personal relationships, and aren’t interested in all the bells and whistles, then going with a credit union makes the most sense. However, it’s not the most convenient option if you want ease of access, or if you prefer mobile banking.
Big banks easily win out in those departments, especially considering they have more branches. If you move, then your credit union will likely cease to be a good option. Remember that community bank I mentioned? I had to get a new bank when I moved because it would have been a hassle to keep banking there.
As long as you’re a conscious consumer (and if you’re reading this, you probably are!), then you should be okay doing business with a larger bank. There’s also nothing wrong with having accounts at both institutions and getting the best of both worlds!
Meeting in the Middle
While we focused on comparing credit unions with big banks, there’s a middle ground to be found with online banks. There are no personal relationships to be had here, but online banks offer technology benefits (apps, mobile-friendly websites), no fees (not even ATM fees), convenience (mobile deposits), and great APYs around 0.90% and above.
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There’s no definitive answer as to whether credit unions are better than banks. It all depends on how you plan to use your bank! In general, you should always look for banks that are easily accessible, have free accounts, decent APYs, and low APRs.
You should bank with an institution that appreciates your business and is willing to work with you, too. If you don’t think your bank offers products you can get the most out of, look elsewhere.
Have you banked with a credit union or large bank before? What about an online bank? Which did you like the best and why? Do you think credit unions are better than big banks?
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Great breakdown Erin! I think, in general, a credit union is going to be the better option due to the service component. You hit the nail on the head in that they are their to serve the needs of the client. You might find a bank who will say that, but by and large it’s marketing speak. That being said, we have accounts with a larger bank, credit union & online banks. It provides us the variety we like and meets our needs.
Great coverage of the differences between these two types of financial institutions. When it comes to daily money management and where to maintain an emergency fund; and activities such as seeking a car loan, it is good to know the pros/cons of both.
Phew, that’s a lot to digest! I do know that betters rates and lower fees are at credit unions, but we need widespread availability, and mobile banking saves us some hassle each month. Plus, it’s easier to find ATMs.
FrugalRules Thanks, John. I used to keep it simple by banking with one institution, but they were lacking in a lot of areas even though they had very personable customer service. It’s definitely nice to have that variety by banking with multiple places!
RetirementSavvy Yes, there’s definitely a lot to consider when thinking about who you want to bank with, but at least we have plenty of choices!
AbigailP I’m a fan of online banking and the wider network of ATMs, too. It helps when you’re in a pinch! I’m hoping we see more banks join the “convenience trend,” especially as they look to serve more millennials.