Blog

What's the Difference Between a Credit Union and a Bank?

In this blog, we’ll discuss how a credit union and bank differ in their organizational structures, products, and services. Basically in this article, we’ll do a matchup of a credit union vs. a bank.

Nearly one-third of Americans, or an estimated 110 million people, are now using credit unions regularly.

However, traditional banks are also evolving at a startling rate, unveiling new online, mobile and digital banking options that appeal to the younger generation.

By understanding the difference between credit union and bank product and service offerings, you can pick the best institution for your financial needs and goals.

What Exactly Is a Credit Union vs. a Bank?

Credit unions may offer many of the same services as traditional banks, but they have a very different internal structure. Because of this, they operate differently in the greater financial marketplace.

credit union and bank products and services

Credit Unions

The formal working definition of the term “credit union” is a membership-based, non-profit, tax-exempt financial entity that operates for the benefit of its members and is owned by its members.

Each credit union elects its own board. The board then makes decisions on behalf of its members using the democratic process.

Members pool funds to provide loans to other members. Investment profits are returned to members in the form of lower loan rates and fees, better savings, and investment rates of return and similar perks.

Credit unions are not regulated by the federal government. There are two types of credit unions: federal and state.

Federally-chartered credit unions are regulated and insured by the National Credit Union Share Insurance Fund (NCUSIF).

State credit unions are typically (but not always) insured by private insurers. The typical insurance benefit provided is up to $250,000 (principle plus interest value) per eligible account.

Banks

The formal working definition of the term “bank” is a non-membership, for-profit financial institution that is authorized via licensure to provide loans, accept deposits and often to provide additional financial services as well.

Many specialized banks exist today, from commercial banks to investment banks. And, of course, traditional brick-and-mortar banks and digital (online-only) banks.

As for-profit institutions, banks must pay taxes on profits earned.

Banks are regulated by the federal government. Most (but not all) banks are insured by the Federal Deposit Insurance Corporation (FDIC). However, where applicable, FDIC insurance only extends up to $250,000 (value of principle plus interest) per eligible account.

How Are Credit Unions and Banks Similar?

Now that we have a comprehensive working definition for both a credit union and a bank, it is time to take a look at similarities between the two financial institutions.

Both provide a similar basic menu of services

Both credit unions and banks are typically set up to provide a similar menu of customer services.

The most common service offerings include checking and savings accounts, loans and debit/credit cards.

Both offer online and mobile banking options

Both credit unions and banks today typically offer ATMs, mobile apps, online banking options, direct deposit and linked accounts with overdraft protection.

Both typically offer some form of insurance protection

In most cases, both credit unions and banks provide insurance of up to $250,000 (principal plus interest) per eligible account.

What’s the Difference Between a Credit Union and Bank?

While it is good to know how credit unions and banks are similar in terms of their service offerings, funds protection, and online/mobile options, the more important criteria for choosing one over the other is often found by looking at differences.

Nonprofit vs. for-profit business structure

Credit unions are chartered as membership-based non-profit entities. This means each credit union is owned by its members and each member has a say (vote) in how the credit union operates.

Banks are owned by their stockholders. These are the people who make decisions based on maximizing the corporation’s profitability.

Membership vs. non-membership

Credit unions are owned and operated by their members through an internally-elected board of directors. This means that before you can access their services, you must join.

Each credit union chooses its own service base, whether narrow or broad. Narrow credit unions might serve only a particular company or demographic. Broad credit unions might serve a whole city or zip code.

Banks are non-membership institutions. Each bank establishes its own criteria regarding who they will work with by checking an applicant’s credit reports, credit score, et al.

Tax-exempt vs. taxed

Credit unions are non-profit organizations. This means they are exempt from paying corporate income taxes. Often, this means credit union members get the same services for lower fees than what a bank might charge.

Banks are for-profit entities and are not tax-exempt. This can translate into higher overhead and operating costs and higher fees.

Narrow vs. broad menu of services

Credit unions traditionally offer a narrower range of services based on what members require.

Banks may offer expanded services to attract new clients as part of their business model.

High fees vs. low fees

Because credit unions are owned and run by members, it makes good sense that fees for services would stay lower.

Banks, with their for-profit business model, typically face higher overhead and investor profit margins driving higher service fees.

Personal vs. impersonal customer service

While credit unions’ famously personal approach to customer service has a longstanding and verified history, here again, the customer service landscape is changing even as the financial industry itself changes.

Compare the Navy Federal Credit Union, with its seven million members nationwide, to the tiny two-branch Oakwood Bank of Texas which operated for decades with only three employees.

However, as the trend towards mergers and acquisitions in the banking industry continues to gather steam, it is safe to say credit unions still have the edge when it comes to personalized customer service.

credit union and bank

Services Provided with Credit Unions & Banks

As you are now aware, in most (but not all) cases, credit unions will have a narrower menu of services than will banks. However, this can also make it easier to decide whether a credit union or a bank is the right institution for your financial needs and goals.

For example, let’s say you have your eye on a new home. Now all you need is a lender to provide you with a mortgage. Here, it pays to apply at both a bank and a credit union (you don’t have to join the credit union until you are approved for a loan).

In many cases, you will find that the credit union can give you a lower interest rate and more generous repayment terms, including a once-annual option for skipping a payment as needed.

But now let’s take a different example. Perhaps you have just changed jobs and you need to reinvest your accrued retirement savings from your old company into a new IRA vehicle. In this situation, you are more likely to find the type of investment product you are searching for at a bank rather than a credit union.

The more you can learn about the services offered at your local credit unions and banks, the better able you will be to choose the right institution for your needs at the time. There is no reason why you can’t use the services of both and many people do.

Nonprofit vs. For-Profit

Not everyone is in a financial position to make the goals of the organization itself a priority when choosing a financial services provider. But it can be a nice feeling to be a part of an institution that is giving back to others!

Because credit unions are fundamentally chartered as non-profit institutions, their entire structure focuses on giving back to the members that give to it.

Some people really like knowing that their choice to place their money with a credit union also makes others more able to obtain loans and lines of credit for big life purchases.

As well, credit unions often offer financial education programs to the greater community as a part of their local community service to existing and prospective members.

However, even though banks are for-profit corporations, they can still choose to become active in community service in various ways, such as by sponsoring local charities.

Membership vs. Non-Membership

You may be wondering just what it entails to become a member of a credit union.

Because every credit union is chartered to serve the needs of a group of members who share at least one thing in common (field of membership), the first step is to find a credit union that you are eligible to join.

Once you do, in most cases joining is no more involved than completing an online application for a new credit card.

Since banks do not require membership, it can feel like that is one barrier to entry that is removed.

However, banks have their own criteria for accepting a new customer and in most cases, you will have to go through a similar process to ensure you meet those criteria before you can open an account or use their services.

Best Choice for Small Businesses & Entrepreneurs

Both credit unions and banks offer products tailored to individuals and businesses.

Just as with car notes, home loans and other types of lending products, it can make sense to research what each can offer you in terms of a business loan.

Pros and Cons of Credit Unions & Banks

Here is a summary overview of the pros and cons of credit unions versus banks.

Credit Unions

Pros:

  • Non-profit and member-driven.
  • Lower fees.
  • Often easier and more flexible loan terms.
  • Personalized service.

Cons:

  • Must find a credit union you qualify to join.
  • Must join to receive services.
  • More narrow product and service offering.
  • Less accessible (ATMs and branches).

Banks

Pros:

  • Bigger variety of products and services.
  • More accessible (ATMs and branches).
  • No membership required.
  • Digital banking options.

Cons:

  • Higher fees.
  • Lower interest rates on savings accounts.
  • More challenging to qualify for loans.
  • Impersonal customer service.

Types of Clientele at Credit Unions vs. Banks

The credit union customers will always share at least one common bond, whether that be a city of residence, occupation, employer, demographics or something else.

In contrast, bank customers typically share only one common denominator: they are all seeking financial services.

Which Is Right for You – Credit Union or Bank?

Both banks and credit unions have a purpose and place in the greater financial arena for individuals and businesses today.

Each has pros and cons, strengths and weaknesses, which means there is no one-size-fits-all answer to the question of which one is the best choice.

Rather, by understanding the difference between a credit union and bank services, you are equipped to pick the best option for your financial needs and goals.