Bank or Credit Union—Which Is Better?

Compare the benefits and find out whether using a credit union or a bank is better for your finances.

Laura Adams, MBA
5-minute read
Episode #292

Bank or Credit Union—Which Is Better?

Are you confused about the difference between a bank and a credit union? They have a lot in common, but they also have some major differences. Today we’ll cover their benefits so you know which type of institution is better for your personal finances..

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Differences Between Banks and Credit Unions

The fundamental difference between banks and credit unions is that banks are for-profit businesses and credit unions are non-profit financial cooperatives. That’s a fancy way of saying that credit unions are owned by their customers or members, and banks are owned by outside investors, who may or may not deposit money there.  

Therefore, banks are in business to please their investors, which can be at odds with what’s best for customers. But credit unions have the sole responsibility to serve their members. That’s why credit unions are known for giving high levels of customer service and have been growing in popularity.

Who Can Join a Credit Union?

When it comes to joining a credit union, there’s a catch: They aren’t legally allowed to serve the general public like banks do. Membership in a credit union must be limited to defined groups, such as particular industries, employers, organizations, or those who live or work in a certain community.

However, don’t assume that just because you’re self-employed or don’t work for the government, that you can’t join a credit union. Some make it really easy to join by offering eligibility to anyone who is a member of a particular charitable organization. Membership in the charitable organization could be as simple as paying a one-time fee of $10 or $15. Also, most credit unions extend eligibility to the immediate family of all their members.

Joining a credit union and receiving top-notch customer service sounds great, but how do they stack up against banks in other areas like interest rates, convenience, and deposit insurance?

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Interest Rates at Banks and Credit Unions

First, let’s talk about interest rates. Banks and credit unions earn revenue by loaning out deposits to customers who want to borrow money. In return for the privilege of using your money for these loans, both banks and credit unions typically pay interest, depending on the type of account you have. As long as a bank or credit union collects more interest from borrowers than it pays out to depositors, and covers its operating expenses, it can stay in business.

On average, credit unions pay more interest than banks, according to bankrate.com. This is because a credit union’s profit belongs to its members, not to management or shareholders. Most earnings are put back into a credit union and ultimately returned to members in the form of benefits, like higher interest rates on deposits, lower interest rates on loans, and fewer fees.

So offering better interest rates is where a credit union can really shine. However, remember that rates vary, so you should always compare credit unions and banks across the country for the type of account or loan that you want.

One of the best places to locate and research credit unions is at ncua.gov, the National Credit Union Administration website. You can compare hundreds of financial institutions at sites like:

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Convenience of Banks and Credit Unions

The second banking feature to consider is convenience. Be realistic about how you prefer to bank. Do you like having a branch down the street with tellers who know you by name when you walk in? Or do you prefer to make transactions remotely using online bill pay or mobile apps?

Credit unions may only have one or a few branches in your area. And since they’re small and local, most don’t have the full range of online and mobile services that come standard with an account at a big, national bank. But credit unions are definitely catching up when it comes to technology, so it’s worth doing a little research to see what’s available.

ATMs are another convenience that may be important if you like to access cash when you’re out of town. Just like some banks tap into shared ATM networks and reimburse out-of-network fees, so do some credit unions. So don’t assume that a credit union won’t be as sophisticated or competitive as a big-name bank.

Deposit Insurance at Banks and Credit Unions

The last banking feature we’ll cover is one that you should never go without: deposit insurance.

Just about every bank insures up to $250,000 per depositor through the Federal Deposit Insurance Corporation or FDIC. What many people don’t realize is that federally-insured credit unions also have the same amount of insurance, even though it comes through a fund under the National Credit Union Administration or NCUA.

You’ll know that an institution has deposit insurance if it displays the official FDIC or NCUA insurance sign in branches or on its web pages. Both types of insurance offer the exact same coverage and are backed by the full faith and credit of the U.S. government.

The decision about whether to use a bank or a credit union depends on several factors. But there’s no rule against using both. You may have a checking account at a large bank, but find a low-rate car loan or mortgage offered at a credit union that you’re eligible to join. 

The key to getting the most from banking services is recognize that you probably have more options than you think and to shop carefully in your local area and online.

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About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.