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What's the Difference Between a Credit Union and a Bank?
Editor’s Note: this blog was originally published on November 9, 2020, and has been updated for relevancy and accuracy
The important differences between a credit union and a bank
Credit unions and banks exist to help you keep track of where your money is going. Both financial institutions often carry the same accounts and loan products. So what’s the difference?
Whether your money is tied to a credit union or a bank, the way they are operated and who they serve is completely different. Let’s break down how they compare to one another.
What is a credit union and how does it work?
Credit unions are run in a way that benefits members directly. It all starts with the fact that credit unions are owned by members, aka, YOU! In other words, banks are public organizations, while credit unions are not-for-profit.
According to the National Credit Union Administration, there were more than 5,000 credit unions with over 120 million members as of December 2020.
The credit union motto is “People Helping People,” and it’s no wonder because credit union members quite literally borrow money from one another. Think of the way credit unions operate as a closed-loop: members work with other members to save money so that other members can borrow that same money.
How do banks operate compared to credit unions?
Banks, on the other hand, operate with their stockholders and investors in mind. You might be asking yourself what this means if you’re a bank customer.
It’s simple: any profits made by a bank are used to pay out dividends to stockholders. Keeping that in mind, there is no direct benefit to being a bank customer unless you own shares of the “company.”
What is a credit union field of membership?
Most credit unions require that you live, work, worship, or go to school in a certain area of the credit union, while others require that you also work a certain type of job in order to qualify for membership. Meanwhile, anybody can become a bank customer.
Number of members of credit unions in the United States from 2013 to 2020 (in millions, shown in the graphic below):
Are credit unions publicly or privately owned?
The private ownership credit unions offer members is a big reason why savings accounts are known as “share accounts” at these not-for-profits. When members take out loans at credit unions, they borrow money from other members. This also explains why members of credit unions are called “members.”
Banks have customers
If you have an account at a bank, you’re known as a customer, not a member. That’s because the money borrowed for loans does not come from others that are part of the organization. Banks are therefore funded by their investors, just like other public businesses.
Do credit unions charge lower rates on loans than banks?
Credit unions are traditionally known for having a community-feel and friendly service. They are also known for offering lower rates on loans, making them a great option if you are considering buying a new car or purchasing your first home, or even if you want to refinance. Expect lower and fewer fees when you join a credit union.
While banks are known for their convenience, like having more available ATMs and branches nationwide, you’re likely to pay more interest on loans you take from a bank.
Credit unions may be limited to the region, county, or city they’re in. However, credit unions are setting up co-op financial services (ATMs you can easily access with no fees even if you are not a member of that specific credit union) and updating mobile apps every day. The co-op shared branch network of certain credit unions has 5,600 branches and 54,000 surcharge-free ATMs that can be used whether you’re a member of that credit union or not.
Due to being for-profit financial institutions, banks find it hard to compete with interest rates at credit unions. You may end up paying more in bank fees for errors, such as bounced checks or overdrafts. The same goes for dividend rates on savings accounts.
According to the NCUA, which regularly compares the rates for credit unions versus banks, credit unions produced higher interest rates on Certificates of Deposit (CDs), money market, and savings accounts while also posting lower interest rates on home and auto loans.
Become a member, not a bank customer, at Fort Worth City Credit Union!
Fort Worth City Credit Union is a community-based credit union. We offer checking and savings accounts, home loans, vehicle loans, and personal loans to our members. Visit our 'Join Now’ page to become a member today!
Consider what you want your financial institution to do for you, and remember to trust the organization that you choose!
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