What Are The Differences Between Banks And Credit Unions?

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Banks vs Credit Unions

Source: Mark Boster / Los Angeles

When choosing where to bank, individuals have two choices: banks and credit unions. While the differences may not be initially obvious due to the fact both offer many of the same services, there are a number of items within their structures that set the two apart. If you are looking for the right institution to do business with, it is good to look at how they are the same and how they are different so you can make an informed decision.

How They Are The Same

Banks and credit unions are alike in many ways. For instance, they both offer checking and savings accounts, mortgage loans, personal loans, CDs, and other specialized accounts. They both have drive through teller windows so you can conduct certain types of business without leaving your vehicle. Most have ATM machines and their own debit and credit cards.

Basically, it all looks the same. You give the institution money and they give it back to you when you need it.

While these similarities are quite straightforward, the differences are rather extreme. You may have noticed that credit union members tend to be very involved with their institutions. They are all about the services, the employees, and ensuring that every ounce of their banking business is done with that institution. In other words, they are very committed. Then again, a person who finds the right bank is going to be equally committed. There are plenty of people who have banked with the same bank for decades, but it seems that people are more likely to stick with a credit union than a bank. Why is this?

How They Are Different

First of all, there are always more banks than credit unions within communities. This is because credit unions are membership-based. In other words, not everyone in the community is going to be able to do business with the credit union unless the credit union opens their doors to anyone within that community. Memberships are typically open to individuals employed with certain companies, within certain industries, or they must meet another set of qualifications. This makes credit unions more community-oriented.

But the one way to set them apart is to look at how each is structured. The financial products may be the same, but their structures set them worlds apart.

The structure of a bank

The bank holds your money and uses it to create profit by investing that money or loaning it to other accountholders. This means every time you make a deposit, you are buying a savings product. Yes, you are loaning the bank money. The bank will then pay you back in interest for giving them that loan.

The reason why banks conduct business in this way is because they are for-profit businesses. The more money they bring in for investors, the better. Every activity they engage in is projected to make a profit, so they have to ensure that happens. They do this by finding that happy medium between profit and customer service, but rapid global market changes can make that balance tricky. Accountholders want to achieve the best interest for their cash and the banks want to recover that money any way they can. They also have to stay on top of the competition.

The structure of a credit union

While the credit union experience can be much like the bank experience, what happens behind the scenes is much different. For instance, credit unions offer checking accounts, but they may call it a “share draft.” Accountholders are not “customers,” but they are “members.” To understand this, it is good to look at a little bit of credit union history.

This history starts in 1908 in Manchester, New Hampshire when the Federal Credit Union Act was passed by Congress to help in the creation of credit unions all over the United States. Although membership was restricted to certain groups of people, most could find a credit union to join. This is what has stood the test of time.

When a deposit is made at a credit union, the member is actually buying shares of that credit union. This makes members part owners of the business. This is why accounts are called “shares.” And rather than a board of directors or corporation making decisions for the credit union, the members make the decisions. They do this by electing individuals to act as their advocates. These elected individuals are usually executives and other volunteers.

And while banks are for-profit, credit unions are non-profit, which means they do not concern themselves with making a profit. Any profits that credit unions make contribute to lower rates on loans and lower fees on other services. At the end of the year, any revenues are distributed to the members in the form of dividends.

But just like with banks, there are drawbacks. These drawbacks aren’t so much in the area of customer service suffering for profits as they are in regards to convenience.

Because credit unions are so community-oriented, it can be difficult to make a withdrawal without visiting the branch. It can help if the branch has its own ATM machine. However, trying to use other ATMs in the community or when traveling can be difficult if the credit union is not a part of a larger ATM network. It is also possible that such services as online banking and bill pay may not be available.

Credit Union Or Bank: Which Is For You?

With this information, you can decide whether or not you would prefer to place your money with a bank or a credit union. Some people like banks because branches are spread out all over the country. They like the extensive ATM networks and the advanced online banking tools and bill pay. Others like credit unions because of the ability to be a part of a cooperative effort by a personable institution that puts them before profits.

To find which is right for you, simply take a look at the banks and credit unions in your area. Get fee schedules from all, find out if you qualify for membership within credit unions, learn about what services are available, compare those services, and then make your decision. This may be how you become one of those committed individuals who do business with the same financial institution for decades.

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About Author

Ginger has over a decade of experience in the area of personal finance. She has provided informative content and advice on a number of finance-related topics to individuals in the U.S. and Europe. She is able to do this because of her personal and professional experience, which includes work in the financial sector and 10 years in tax preparation. She resides in Ohio with her husband and three children.


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