Credit Union vs Bank
A battle of the financial institutions…
Many people wonder what is the difference between a credit union vs a bank? In essence they both exist to accept deposits and then use those deposits for lending activities. Both banks and credit unions offer similar financial services, however, there are some important differences that you want to be aware of so that you can make an educated and informed decision. Keep reading to explore the characteristics of a credit union versus a bank so that you may determine which is the most appropriate for you.
What is a Credit Union?
A credit union is a member-owned, not-for-profit, financial cooperative. What does all that mean, you ask? Well, let’s break it down:
- Member Owned: Becoming a member of a credit union is easy. Usually, to join a credit union you must meet certain eligibility requirements. Typically this means you must live in a certain geographic location or a certain employer must employ you or your spouse. Easy stuff. Once you become a member and have an account at the credit union, you are a part owner of the credit union. It does not matter if you have a $100 account or a million dollar account; you get one vote just like all the other members. The vote is used for the election of the Board of Directors. The Board sets the policies and procedures of the credit union, like the savings rates.
- Not-for-Profit: This doesn’t mean a credit union is a charitable organization that requires donations – that’s a non-profit. A not-for-profit basically means the organization exists to accomplish its’ goals (i.e. serve the financial needs of its’ members). It needs to make some profit, for example, to upgrade equipment, re-pave parking lots, build new locations, etc., but any profit left over is used to offer members better rates, lower fees, etc. Also, non-for-profit means the Credit Union is exempt from many federal, state and local taxes, so this lets them pass on the savings to their members. Obviously, a bank exists to be as profitable as it can for its’ owners, and those profits are shared with the owners/shareholders, not the account holders.
- Financial Cooperative: This means it is a financial institution owned and operated by the members who pool their money together in order to provide loans and other financial services to the other members. Co-ops also strive to provide services intended to support community economic development.
Advantages of Credit Unions
So now that the – what is a credit union question has been answered, the next thing we need to do is analyze the advantages of a credit union vs a bank.
- Members are the owners. So you share in the profits instead of the company itself. This results in interest and loan rates that are more favorable than many bank rates. Also, the costs associated with processing fees, closing costs, etc, tend to be lower than banks.
- Credit Unions are not-for-profit. This means they are tax exempt. You know as well as I do, taxes aren’t cheap and since banks have to pay them and credit unions don’t, this provides a competitive advantage to credit unions that banks have complained about for years. The tax saving gets passed on to the members in the form of higher credit union interest rates, lower mortgage rates and cheaper fees.
- Financial services. Larger credit unions offer almost all of the same financial services as any large national bank. You will find they offer the basics like checking and savings accounts, also mortgage loans, personal loans, car loans, money market accounts, certificates of deposit and some business services. Most also provide online banking as well.
- Customer service. Time and time again, survey’s have shown credit union’s have a much higher customer service rating than banks. The purpose of the existence of a credit union is to improve the financial health of their members and assist in the economic development of the community. Banks, like all for-profit businesses, exist to make the most amount of profit possible for the owners/shareholders. This profit-first philosophy can sometimes lead to poor customer service.
- Community based. Credit Unions are smaller than many banks meaning a more personal service. Many credit unions are based in one geographic location, so the members and the workers all live in the same area. This allows the credit union to understand the distinctive economic situations that exists in your area. So, if you have a unique financial situation, it is much easier dealing with someone locally.
With our analysis of the advantages of a credit union vs a bank complete, lets take a look to see if credit unions are better than banks for your particular financial needs.
Are Credit Unions Better Than Banks?
For the average person in need of straight-forward financial services, in my opinion, yes, credit unions are better than banks. I wouldn’t consider it a huge advantage, but even if all things were equal, I still prefer to do business locally.
Disadvantages of a Credit Union vs a Bank
The main disadvantages of a credit union are that they do not offer the full spectrum of financial services like a bank does and they have limited locations. So for those that travel and frequently use ATM’s, transaction fees will have to be paid. If you are considering moving to a location outside of the area that your credit union serves, it will be a hassle closing your financial accounts and moving them to a different financial institution with a office closer to your new home.
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