The important distinctions between credit unions and banks.
Apr 17, 2023
When you are in the market for a new checking or savings account, a home mortgage, auto loan or other financial services, you have more choices than just the local and national banks that dot the landscape. One overlooked option for financial services is the credit union, which offers many of the financial products and services you can get at a bank.
But what is a credit union, and how is it different from a traditional bank? There are important distinctions between banks and credit unions, even though they offer similar products.
Knowing the differences between credit unions and banks can help you decide which best fits your financial needs.
Non-Profit vs. For-Profit
One of the major differences is that banks are for-profit, meaning they are publicly traded or in some cases privately owned. Credit unions are non-profit organizations and are owned by their members and established as a cooperative. This for-profit vs. not-for-profit divide is the reason for the difference between the products and services each type of institution offers.
A publicly traded bank answers to shareholders and exists to return investment profits to shareholders. Most decisions a bank makes are what is in the best interest of the shareholders not the depositor or account holders. A bank’s focus is to make a profit, rather than specifically centering on the needs of the account holders. This is one of the reasons you’ll often find that banks charge more fees, and at a higher rate, than credit unions do. Interest rates on lending also tend to be higher at banks, while their APYs on savings products tend to be lower.
A credit union is owned by its members and typically opens membership to individuals who share a common bond, such as the industry they are employed in, the community they live in, their faith or their membership in another organization. In addition, as a nonprofit, credit unions are also generally exempt from federal taxes, and some credit unions even receive subsidies from the organizations that they are affiliated with. This means credit unions do not have to worry about making profits for shareholders. It is the credit union’s mission to provide its members with the best terms it can afford for their financial products. This means members generally get lower rates on loans, pay fewer (and lower) fees and earn higher APYs on savings products than bank customers.
Advantages of Credit Unions Over Banks
• As highlighted by the recent bank failures in California, Credit Unions are consistently more conservative in their risk taking since they are not interested in returning profits to investors. This approach makes credit unions a superior choice for depositors who want better peace of mind that their funds are safe and protected.
• Credit unions generally offer higher interest rates on savings accounts and lower rates on loans which help your money grow faster, while lower rates on loans make it cheaper to borrow money.
• Since credit unions are smaller in scale and committed to serving their members, not investors, they tend to provide better customer service. Customer relationship specialists will give you more personalized attention and help you identify the best services for your needs or help increase your financial literacy with a more personalized touch than you will find at a bank.
• Credit unions tend to have lower fees and costs and more flexibility than banks.
FDIC vs. NCUA
While credit unions are not insured by the Federal Deposit Insurance Corporation, or FDIC, Congress created the National Credit Union Administration (NCUA) in 1970 to insure deposits in credit union accounts. Like FDIC insurance, NCUA insurance guarantees up to $250,000 per share owner, per insured credit union, for each account ownership category, should the credit union close or go into conservatorship. All federal credit unions and most state credit unions (including Smart Financial) are insured by the NCUA. And prominently display their insurance status on signage in their branches and websites.
Bottom Line
While banks and credit unions offer several of the same products and services, they are not the same. For consumers who need nationwide convenience and investment advisory services, a bank may be the better bet. But consumers who need lower rates and fees, higher APYs, a personal touch when it comes to customer service and access to excellent, free financial education may do better with a credit union. Here’s a tool from the NCUA to research credit unions including Smart Financial. Credit Union Locator & Research A Credit Union/NCUA.
Smart Financial is here to serve the financial needs of residents in the greater Houston region. Established in 1934, Smart Financial is one of the oldest and more well-established credit unions in the Houston area. To learn more about the benefits of joining the Smart Financial family, check out the Membership Tab of our website or give us a call at 713-850-1600.