Credit unions and banks are both financial institutions that offer similar services such as checking accounts, savings accounts, loans, and credit cards. However, there are some key differences between the two that make credit unions a better choice for many people.
Regulatory Foundations: A Brief Background
Before diving into the direct benefits, it’s essential to understand the foundational differences between these two types of financial institutions. Banks are for-profit organizations owned by shareholders. They aim to generate profits to increase shareholder value. In contrast, credit unions are not-for-profit financial cooperatives that are owned by their members. The primary goal is to serve those members rather than generating a profit for external shareholders.
Regulatory Environment The regulatory environment also varies. Banks are usually regulated by a mix of state and federal agencies such as the Federal Reserve and the Office of the Comptroller of the Currency (OCC), whereas credit unions are overseen by the National Credit Union Administration (NCUA). Each comes with its own set of rules and customers.
Credit Union Ownership
Credit unions are not-for-profit organizations that are owned by their members. This means that they don’t have to pay dividends to shareholders or generate profits for investors. Instead, they can offer lower fees and better interest rates on loans and savings accounts. Banks, on the other hand, are for-profit institutions that are owned by shareholders. They have to generate profits for their investors, which often results in higher fees and lower interest rates.
Credit unions generally offer higher interest rates on savings accounts, CDs, and other deposit accounts. This is because they distribute their earnings back to members in the form of better rates, as opposed to banks, which distribute those profits to outside shareholders. For borrowers, credit unions often offer lower interest rates on loans, including auto loans, personal loans, and home loans.
Credit Union Service
Secondly, credit unions tend to offer better customer service than banks. Since they are owned by their members, they have a vested interest in providing excellent service and meeting the needs of their customers. Credit unions also tend to be more flexible than banks when it comes to lending decisions and other financial matters. As smaller institutions, credit unions can get to know their individual members better. In addition, credit unions are often founded to service a specific group of people such as employees of a company, or residents of a specific area. This allows a credit union to target its services and offerings to that group.
Thirdly, credit unions are often more community-oriented than banks. They tend to focus on serving the needs of their local communities rather than trying to maximize profits. This can be especially beneficial for people who live in underserved areas or who have difficulty accessing traditional banking services. Credit unions are deeply rooted in their local communities. They sponsor local events, offer financial literacy programs, and often make decisions that are community-centric rather than purely commercial.
Better Rates and Lower Fees
Finally, credit unions offer many of the same services as banks but with fewer fees and lower costs. For example, many credit unions offer free checking accounts with no minimum balance requirements or monthly fees. They also tend to have lower overdraft fees and ATM fees than banks. According to the Consumer Financial Protection Bureau (CFPB), the average overdraft fee at a bank is around $34. Credit unions, on the other hand, tend to charge lower fees, averaging around $26
In conclusion, credit unions are a great alternative to traditional banks for many people. They offer better interest rates on loans and savings accounts, better customer service, a more community-oriented approach, and fewer fees and costs. If you’re looking for a financial institution that puts your needs first, then a credit union might be the right choice for you.
Credit Unions and Cash Apps
Where credit unions can be falling behind banks is integrating with non-bank cash apps such as Venmo and Zelle. Be sure to see if your credit union will support what you need.