When it comes to where you put your money, it can be hard to pick between a credit union and a bank. They look the same on the outside, but are they really the same type of financial institution? Which one is better for your savings and checking accounts?
Here is the low down on what a credit union is and whether or not it is right for your finances.
If you’re just looking for credit union options, check out our list of the best credit unions here >>
What is a Credit Union?
Credit union members, like bank customers, have access to checking and savings accounts, CDs, loan products, and credit cards. What makes a credit union different from any bank is that it is actually a cooperative financial institution that is owned and controlled by its members. Its members are those who use the institution, such as people who have a checking account, savings account, or loan. The purpose of the credit union is to promote savings and provide credit to its members.
One huge difference is that credit unions are non-profit companies, where as banks are focused on profit. This means that credit unions tend to have their members best interests in mind. This is also why you will not see as many promotional deals or advertisements from credit unions. While a credit union doesn’t seek financial gain from their customers, they still charge late fees and APR for loans. Since banks are for profit, they are also more likely to take bigger risks and charge their customers with higher fees and lower savings rates in tight times.
Since a credit union is made up of members, all of the members need to be related in some way. For example, a teacher’s credit union will just be for those who are teachers. A standard credit union may require you to be related to or know another credit union member or live in a certain area (there are a lot of county-focused credit unions). While this may seem daunting, most people will be able to secure access to a credit union account.
You don’t have to worry about putting your money in a credit union either. Many individuals think that since credit unions are different than banks that they offer little in means of financial security. This is simply not true. Just like the FDIC (Federal Deposit Insurance Corporation) insures regular bank deposits, deposits at a credit union are insured up to $250,000 by the FCUA (Federal Credit Union Association). Also, when you look at the last financial crisis, more banks went out of business compared to the number of credit unions that went under.
Benefits of a Credit Union
A credit union can offer many benefits over a traditional bank. Here are just a few:
- Better Rates on Savings and Loans: Some credit unions have better savings rates over other local banks. Of course, online banks tend to win when it comes to the highest interest rate, since they do not have the same expenses associated with brick and mortar locations. According to S. News, “The National Credit Union Administration reports that as of June 2014, the five-year loans for new cars at banks have an average interest rate of 4.88 percent, compared with 2.74 percent for credit unions.”
- Lower Fees: Even though credit unions still charge fees, they may charge a lesser amount. For example, traditional banks charge a $35 overdraft fee, where as some local credit unions might only charge $25. Credit unions are more likely to have low to no minimum account balances, which means you will not have to pay a monthly fee to hold a savings or checking account.
- Better Service: Since credit unions are member-focused, you can expect better service. It is nice to go into a small branch and be greeted by a banker who knows you.
- More Flexibility: Larger banks do not usually have the time or resources to check over loan and mortgage applications. Because of this, they will automatically decline a loan based off of numbers. Credit unions, on the other hand, look at loan applications based on the whole picture. They look deeper than just your credit score and can extend loans based off of merit. They are also more willing to make exceptions for unique circumstances, such as being self-employed or having a bankruptcy on your record.
- They Are Part of the Community: Credit unions are more likely to be involved in community events and charities.
Disadvantages of Credit Unions
- Accessibility: If you bank with one of the big names, like Chase, chances are you will easily find an ATM or bank location in just about any city. Chase banks and ATMs are everywhere it seems, even in popular grocery store chains and CVS stores. Credit unions on the other hand are meant to serve a community, so usually there is only one or two locations in an area. Having a checking account with a credit union could make traveling harder, since you will have to rely on other ATMs for cash, which can cost $3-5 per transaction. Check with your local credit union to see if they offer ATM fee reimbursements.
- Not as Many Bells and Whistles: Since big banks have a lot of money at their disposal, you can bet that they will have cutting edge technology. A local credit union may not have the banking technology that you crave, such as an app, check cashing through your smartphone, online bill pay, or EMV cards. However, many credit unions are trying to stay on top of what is current, so you might be pleasantly surprised by how up to date your local location is.
- Low Rewards: When it comes to cashback rewards through credit card spending, very few credit unions have it. In fact, according to bankrate.com, “Some cards issued by banks offered up to 6 percent cash back in certain spending categories, credit-union-issued credit cards topped out at 1.5 percent.” If you are going to get a credit card, you might as well utilize it to your advantage by getting as much of a reward for spending as possible.
Can Credit Unions Compete with Banks?
So, given that credit unions are there to serve their members, can they compete with savings rates and loan rates compared to banks?
Some credit unions offer the same savings rate and loan rates that traditional banks offer. What you usually will not find, though, are promotional offers for signing up for an account. Since the larger banks are all about the profits, they have more money dedicated to advertising and promotions.
For example, Discover Bank typically offers one of the best yields on their high yield savings account.
When you research the lowest banking rates or best loan rates, you might notice something. There are not a lot of credit unions listed on the popular financial sites. This is not because your local credit union doesn’t offer good rates. Instead, big banks are more likely to offer a kickback to websites that promote their products, which makes the site more likely to push a particular bank or write praise about it.
How to Find the Right Credit Union
Since credit unions are local, there is a good chance that one of your friends or family members has an account with a local credit union. Ask them about it and see if they like it. Also, you can visit MyCreditUnion.gov or NCUA. If there are several credit unions around you that are eligible for you to join, take some time to compare their rates and offerings. Not sure if you qualify to be a member? The easiest thing to do is just to ask. Many credit unions have easy guidelines to join.
We have a list of the best nationwide credit unions here so you can compare.
The Bottom Line: Which Is Better, A Credit Union or Bank?
Is a credit union the best choice for you? The answer really depends on what you want in a financial institution. If you want accessibility and the ability to cash in on great promotions and rewards, then a big bank may be your thing. However, if you desire to have a financial institution that cares for you and your finances, then a credit union wins hands down. Just ask individuals that have banked with both a bank and credit union, and majority of the time, they will say they prefer the credit union.
When it comes to rates, the top competitive banks and credit unions will have very similar rates on financial products. Since most rates are competitive, you can then focus on other features that matter to you.
For me, my bank of choice is USAA. You can see in my free tools section the other financial tools I use, and they are mostly large banks. In my experience, I’ve found higher interest on my savings, and lower loan rates by finding online major banks. Every time I’ve shopped by local credit unions for car and home loans, they’ve always been about 0.50% higher than the best rates online offered by major banks. That is a big difference on a home loan.
Readers, now is your chance to weigh in. Have you ever had experience with a credit union? Do you like them more than traditional banks? Why or why not?
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here and here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.