Banks Versus Credit Unions

Posted by Nick on June 6, 2012

Are banks or credit unions better? This is a subject I am very adamant about. There are so many facets of the debate between these two financial institutions, and I have no qualms defending what you will obviously see is my preference!

What’s the main difference? How do you define a bank and a credit union?

What is a bank? What is a credit union? I’ve talked to many of my friends and family about the difference between the two, and why the one is better than the other.

Simply put, both banks and credit unions are places to store money in the form of checking, savings, and other types of interest bearing accounts, and places to get mortgages, car loans, and other types of interesting paying accounts.

So why is one better than the other?

Banks

A bank is a for-profit business. They loan money out, charge interest on those loans, and take money in, and pay interest on those savings. After other business expenses, the bank should have a profit (although not always like the case of the $2 Billion JP Morgan Chase loss) from having higher interest payments coming in from loans than the interest paid out for savings.

Nothing wrong with that, right? Well, as far as businesses go, no, that’s pretty standard. You buy a product, and hope to sell it at a profit, after expenses.

Credit Unions

The main difference between a bank and a credit union is that a credit union is a non-profit organization. What does this mean for you and me? A credit union simply doesn’t have the incentive to make a profit. They are ultimately responsible to their members (customers – you and me) instead of stockholders. And since they are only paying business expenses, and not trying to make a profit on top of that, they are able to offer savings accounts and checking accounts with higher interest rates, and loans at lower interest rates than banks.

Some of you may be concerned that your money is not as safe at a credit union as it is at a bank, as bank savings are protected by the FDIC limits, or Federal Deposit Insurance Corporation. However, credit unions have the same protection, just through a different agency: The NCUA, or National Credit Union Administration. Your money is as safe at a credit union as it is at a bank.

One other important aspect of credit unions is that, as opposed to banks, not everyone can join a particular credit union. You have to be part of what is called a “member eligibility” group. Some credit unions have very large eligibility groups. Navy Federal Credit Union, for example, allows membership for anybody serving in the military, working or contracting with the Department of Defense, and all of their close family members. Smaller, local credit unions usually have stricter requirements, but most allow membership for those living or working in a given area.

So, credit unions are better?

Most definitely! With lower loan interest rates, higher savings interest rates, and (generally speaking) better customer service, you get all of the benefits of a bank, but a much better experience with a credit union. If you still use a bank for your financial needs, I highly recommend changing to a credit union.

How do I find a credit union?

The NCUA has a great website, ”Find a Credit Union” where you can put your work or home location in to find a credit union near you. You should be able to find one that you qualify for membership from this web site.

So what’s next? Move that money, baby! When I switched to a credit union, I moved my savings and checking first, which is a straightforward process. Later, when I refinanced my mortgage, I did so at my credit union. Once you’ve got everything moved over, say goodbye to banks for good! You’ll thank yourself in the long run.

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Comments to Banks Versus Credit Unions

  1. Totally agree! I’ve been with my credit union for several years and financed both my mortgage and car through them. They had the best rates around (both for earning interest and paying interest). My one complaint is that I felt I had double check a lot of the paperwork as I felt the work was done less competantly, but that may have been specific to my CU. Incidently, my CU had to be taken over by the National Credit Union Administration. It’s a totally smooth process and I wouldn’t have even noticed if I hadn’t received a letter about it in the mail.

    Rebecca

    • Yes, from what I have read, the NCUA works much the same as the FDIC. I remember hearing an interview on NPR where an FDIC employee explained the process; the bank closes Friday as usual, the FDIC employees come in to work with the bank employees over the weekend, and by Monday morning, everything is changed over to the new bank. Pretty cool, I thought!

      Nick

  2. I agree! I’ve been using credit unions exclusively since 2000.

    Linda

    • Likewise (well, a little bit longer). I also have used banks simultaneously, and there is just no comparison.

      Nick

  3. Credit unions are the only way to go. I wouldn’t trust my money to someone who wanted to make money off me aka banks

    Katie Christianson

    • Precisely; the profit vs. nonprofit is ultimately the bottom line between the two.

      Nick

    • Credit unions do in fact make a profit. They must in order to preserve their regulator required financial ratios especially as their assets (deposits) grow. However,they are not nearly as profit driven as large banks.

      Bryan

  4. There are actually TWO main differences between a bank and a credit union. As stated, one is that credit unions are non-profit. The second is that when you become a member of a credit union, you become a shareholder and hence, part owner of the credit union. That is a major reason that credit unions tend to be more member (customer) focused than banks. And, in fairness, small local banks tend to act more like a credit union. The large banks are the ones that give the entire financial industry a poor reputation.

    Although CU’s are considered non-profit, they do in fact make a profit. They must in order to maintain required financial ratios mandated by their regulator, the NCUA. However, they are not nearly as focused on profits as large banks.

    Bryan

  5. Although CU’s are considered non-profit, they do in fact make a profit. They must in order to maintain required financial ratios mandated by their regulator, the NCUA. However, they are not nearly as focused on profits as large banks. Also, as a member of a CU, you are also a shareholder, and hence part owner. That is the main reason CU’s are very customer focused, because you are an owner. In fairness, small local banks tend to act more like a CU. It is the large mega banks that give the industry a poor reputation.

    Bryan

  6. I am predisposed to like credit unions for all the reasons everyone mentions here, but in my area, I have never found a credit union which offers better deals than some of the small local banks. I don’t know why this is true, but I have yet to be enticed to join a credit union.

    Donald

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