Banking » Guides » Credit Unions vs. Banks: Which Is Better For You?
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Credit Unions vs. Banks: Which Is Better For You?

From the way they present their products and services, you may not be able to see the difference between a commercial bank and a credit union. But in many aspects, they’re miles apart. 

You can trust the integrity of our unbiased, independent editorial staff. We may, however, receive compensation from the issuers of some products mentioned in this article. Our opinions are our own.

It can be difficult to differentiate a credit union from a bank by the way they do their business.

Credit unions are non-profit financial institutions that have the authority to do the financial transactions that most banks also do.  You can open a standard savings and checking account, a certificate of deposit, and money market account. If you need a loan, you can secure a mortgage, home equity loan, personal loan, and auto loan from your credit union.

Of course, these services just contribute to the credit union’s primary objective for their members:  to help them save money.  One other objective is to provide them access to comparatively low-interest loans to the members. It is a popular knowledge that credit unions have always made loans available to people of ordinary means and social status.

Credit unions can give lower rates for loans and higher interest on savings because of their not-for-profit cooperative nature. So, instead of giving the profits to stockholders, credit unions return the earnings to their members by way of dividends and enhanced services.

Credit Unions Services

Each credit union is unique in several ways so even the products it will offer may not be the same as the others.  The big credit unions can offer a wider variety of products and services, but the small ones might just stick to the basic products.

Although it may surprise you to know that some small credit unions can tie-up with other organizations to meet their customer demands.  It’s best to contact your local credit union and inquire about their services, fees, and other options like apps or online banking when you make a serious search for a good credit union for yourself.

Here are some products and services you can find in a credit union and a lot of them will also be available at your local banks:

  • Savings, checking and ATM accounts
  • Money market and IRA accounts
  • Credit cards
  • Personal loans (both secured and unsecured)
  • Home mortgages and home equity loans
  • Auto and recreational vehicle loans
  • Traveler's cheques, money orders, certified checks, and foreign currency exchange

Credit Union Vs Bank: The Differences

From the way they present their products and services, you may not be able to see the difference between a commercial bank and a credit union.

Credit Union Vs Bank: The Main Difference

But structurally, they’re miles apart.  A credit union’s owners are its members who have deposit accounts at the organization. Technically, a credit union is a financial cooperative.  A credit union exists basically for its members’ benefit.

All depositors are owners and there is no distinction whether you have $100 or $10,000 – when it’s time to elect the board, your being a member still entitles you to just one vote.

On the other hand, a commercial bank exists to generate profits for its shareholders, so you would often see that traders buy and sell their stocks in the stock market.  The people who own these banks are there primarily to earn from their investments.

To them, a depositor is simply someone who has put his money in the bank for a variety of reasons.  For the bank, the money is a resource that it can use to make more money for the company and not for the depositor.

JD Power National Banking 2020

Let’s get this straight:  we are not saying that credit unions are the ‘good guys’ and banks are the ‘villains’.  We’re just saying that because of their inherent responsibilities, their focuses are different.  A bank is responsible to their stockholders, a credit union is accountable to their members.

Knowing this key difference will help you understand the other differences.

1. Credit Union Account vs. Bank Account: General Differences

  • Size and Geographic Footprint

Credit unions cannot be as competitive as banks in terms of the financial services that they offer because of their limited income and geographic presence.  Normally, they will have fewer ATMs for their depositors and a very basic online banking facility, if at all.  Without the IT resources that banks have, credit unions can’t put too many funds into maintaining a sophisticated website and account portals.

Because of their nature, credit unions will also have a limited number of physical branches.  This is almost a given because credit unions are there to serve smaller communities or groups.  So, if you’re traveling and then find yourself in need of your credit union’s service (like maybe an ATM), you may be in for a bit of tough luck.

Whatever the credit unions lack in terms of branch network, they usually make up through a more personalized customer service experience.

If you are a credit union member, you will normally feel that you’re receiving a more personal, community-like reception when you do your transaction with the credit union employees.

But remember that some small banks can also give you this kind of service – it is not exclusive to credit unions.  And some credit unions are relatively big, so they may not exactly have a limited geographic footprint.

  • Eligibility Requirements

Your ability to open an account is a very significant difference between a credit union and a bank.  While you may find it easy to just walk into a bank and open an account, that is not always the case with a credit union.

To keep their tax-favored status, the law requires credit unions to limit their customer base to a group of people who all share a common distinction.  The law calls this the “field of membership”.

If you meet that common bond, then it’s easy to meet the credit union’s requirement.  You may be able to join a credit union based on:

  • The specific work you do or the type of industry you work in
  • The school you go to/went to or the church where you belong
  • The community or geographic area you live in
  • Your membership in an organization (you can join online to most of them)
  • A family member’s eligibility to the credit union

Wherever you live or work, there’s a high probability that there is a credit union within walking distance that you can be eligible for.  There are credit unions that even serve their members remotely or fully online.

  • Safety and Guarantee

Safety will often come up as an issue when people choose between a bank and a credit union.  Many people are not aware that most credit unions carry federal insurance, the backing of the NCUSIF and the U.S. government.  Banks rely on the FDIC, which is another government agency, for their deposit insurance.

Under current laws, both the FDIC and the NCUSIF protect up to $250,000 per depositor.  To have additional protection, if your money will exceed the coverage, it may be wise to put the excess in a different account or in a different institution altogether.

What we’re saying is, your money will have some sort of protection whether you put it in a bank or a credit union.

  • Technology 

Don’t expect credit unions to be abreast with the latest technology in banking.  The big banks have deeper pockets, so they have the luxury to invest in cutting-edge technology as fast as they come.  Credit unions can’t always do that.

In the past years, banks have shifted from traditional to almost fully online.  Your national bank would probably allow you to check your balance, move funds, apply for credit cards and loans, pay bills or ask for money market quotes – all online without having to call the bank.

  We doubt if you can find a credit union that will have that same kind of online interface.

2. Credit Union Mortgage Vs. Bank Mortgage

  • Rates & Fees

Given the same size, type and term of a loan, you would predictably have to pay lower fees to a credit union compared to a bank.  Remember that credit unions try to earn only as much as is necessary for them to continue operations and not primarily to make humongous profits, they ‘return’ extra funds they earn to members in the form of higher interest on deposits or lowered fees.

In turn, this means that the closing cost (not including no closing cost mortgage) and origination fees, if ever they collect, will also be much less.  Credit union mortgage interest rates generally tend to be lower than those of traditional banks.  However, the rate difference may not be as wide as you might be expecting. In addition, the diversity of mortgage product are much better in traditional banks than credit unions.

  • Approval Process

Typically, the mortgage approval process for credit unions is more lenient to members compared to what traditional banks follow.  This is because credit unions are not corporations that must stick to a prescribed set of rules and restrictions – unlike banks in general.

Their legal personality gives them the flexibility to work with borrowers with non-traditional sources of income and clients with less than the ideal financial background.

For example, if you are a freelancer or self-employed, have a low credit score or past loan defaults, a credit union may be more open to accommodate your loan application than a traditional bank.  Because credit unions cater exclusively to their members who belong to certain types of groups, they extend special courtesies such as loans that they have specifically modified to fit the members’ financial status.

  • Not Selling Your Mortgage Loan

If you are familiar with current banking practices, you may know that lenders (like banks) customarily sell the mortgage loans to various lenders or services.  This process can happen over and over during the 30-term of a common mortgage.

For the borrower, there’s really no additional risks or burden on his part.  However, it is still inconvenient even if it is not your own doing.  You see, each time the lender sells your mortgage, you will have to make payments to a new company and most often in a new location. Although most lenders are very efficient, it might still open situations of late payment postings or even issues with escrow accounts.

As a practice, credit unions would not normally sell your mortgage.  This is because credit unions give out “in-house” loans to earn from interest income rather than selling them to earn a one-time fee.As a borrower, you can have the assurance that you will just be dealing with one and the same lender until you’ve fully paid off the loan.

3. Credit Union Personal Loan Vs. Bank Personal Loan

  • Credit Unions Offer Better Rates

Credit unions naturally offer power rates on their loans. They have the capacity to redirect any surplus funds to help their customers because they do not concern themselves with making too much profit.

  • Customer Service

Credit union staff are more personal, and this is ideal when transacting over the counter especially when you’re applying for a loan.

At a traditional bank, they will do most of the dealings and evaluation online and on paper – you’d hardly have to talk to a live human being.

Credit unions still take the old school personalized approach.  Many of them take time to get to know their customers and local markets more comprehensively.  So, when they evaluate a loan borrower, they will try to get to know the applicants on a more personal level (his work, habits, financial ability) and not confine themselves to conventional indicators like credit scores and tax returns.  You might say that a credit union would listen to your personal appeal why they should give you a loan.

  • Bad Credit Loans

Let’s face it:  banks do not like to risk their money with borrowers who they think may not be able to repay them – such as those from the low to middle-income groups.

Credit unions are more open to these groups.  Potential borrowers who don’t bring in a flawless profile such as immaculate credit history, are more likely to get a loan from a credit union than from a bank.

4. Credit Union Credit Card Vs. Bank Credit Card

  • Rewards Program

A rewards program is almost a standard feature of a credit card, but credit unions are slow to keep pace with banks in this area. Many banks offer incredible rewards program because they see that it is a key consideration that sways a customer to patronize a certain bank and get a credit card.

Those banks have programs that reward credit card customers with points, mileage, cashback or sign-up bonuses.  So, while banks offer a wide range of credit card rewards including special deals and exclusive promotions, you won’t find the same features from a credit union.

If you’re shopping for a credit card, you are likely to be aware of the biggest brands on the market. However, one factor you may not have considered is the number of complaints for credit card issuers.

In this chart compiled using Consumer Financial Protection Bureau data, we can see that Capital One had 11.8 complaints per billion dollars charged. This is followed by CitiBank at 10.55. At the other end of the scale, AMEX appears to have the fewest complaints at just 1.59 complaints per billion dollars.

Credit Card Issuers Complaints Per Billion Dollars Charged

  • (Two) Shot Opportunity

Suppose that you apply for a credit card from a credit union and they turn you down, it is not the end.  Normally, you will still have the option to ask the decision makers to take another look and reconsider.  Some credit unions have procedures for this situation where a loan committee composed of employees and members review the initial credit decisions.

So, even if they initially turn down your request for a low-interest card, you can always write a letter of appeal to the committee and explain your side.  If they see that you have the income to maintain the card and a low-interest card can help in your financial management, they might eventually give their thumbs up.

5. Credit Union Saving Account Vs. Bank Credit Saving Account

  • Savings Interest

Credit unions usually offer a higher interest rate not only in savings accounts but also in CDs, IRAs, and money market accounts.

Since they are non-profit organizations, they can easily re-channel surplus funds to their members by giving them higher interest on deposits.

  • Account Fees

Credit unions want to help members and aim to return the profits to owner-members, so they try to keep account fees to a minimum.  The result would often be free checking account at a credit union minus all the account restrictions that most big banks impose.

And those pesky fees that banks charge for simple transactions like direct deposits, fund transfers, wire transfers, and balance transfers?  You’re most likely to find them non-existent with your friendly credit union down the block.

Which One is For You?

Which one is the runaway winner?  There is no choice carved in stone.  There will be people who will put a premium on the personal touch service that a credit union gives but there will also be people who will prefer all the extra convenience they can find from the online banks.

Others will still stick to the security that traditional banks provide.  It will still depend on your personal needs and which features really mean the most to you.