When you’re searching for a new checking or savings account, there are several options available for the type of financial institution you might do business with. Two commonly used institutions you might consider: banks and credit unions. But not all financial institutions are created equal.
Knowing how each institution works, and the key differences and similarities, can help you make a more informed decision about which one is better suited to your short and long-term financial needs.
Banks vs. credit unions
Banks are federally regulated institutions that offer deposit and lending products, in addition to other financial services, to help customers manage their money. Banks primarily serve as the middle point between depositors who need a place to store their money and consumers who hope to borrow from that pool. Aside from deposit products and lending services, many banks also offer credit products, home and auto products, investment products, and more.
Credit unions offer most of the same products that banks offer, but they are members-only, nonprofit financial institutions. Credit unions still charge fees in the same way banks do, but any profits are returned back to its members in the form of improved or more affordable products. Banks distribute profits among shareholders.
We’ll dive deeper into what banks and credit unions have in common—and what they don’t.
Key similarities and differences between banks and credit unions
One major point that separates banks from credit unions is how each financial institution operates. Credit unions are membership-based institutions, meaning that if you hope to create an account with them, you’ll need to meet certain eligibility requirements, and these can change depending on the credit union. Banks don’t adhere to the same membership requirements, although certain accounts may have specific opening and minimum deposit requirements that you’ll be expected to meet.
For-profit vs. nonprofit
Credit unions are created to serve their members, not shareholders. Any profits earned through their financial products or services are reinvested in those products to improve them and make them more affordable for members. As for-profit institutions, banks are publicly or privately held institutions whose sole intention is to earn a profit that will be paid to shareholders.
“Banks typically seek to maximize profits and create value for shareholders through dividends and/or share price appreciation,” says Keith Sultemeier, president and CEO of Kinecta Federal Credit Union. “Credit unions also seek to maximize value for their member-owners, but accomplish this through lower fees, better rates, and higher levels of personal service.”
FDIC vs. NCUA
Both banks and credit unions will typically offer some sort of insurance for deposit products in case the institution fails. For banks, the Federal Deposit Insurance Corporation (FDIC) will offer insurance coverage up to $250,000 per depositor, per bank, for each account ownership category.
“In a non-FDIC-insured bank, if that entity were to fail they are subject to a bankruptcy,” says Martin Becker, chief of deposit insurance at the FDIC. “A trustee then divvies up the money, and in that case the [depositor] is not a depositor, they would be investors. They would be subject to a loss of some or potentially all of their money, along with significant delays in getting their money.”
Credit unions are insured by the National Credit Union Administration (NCUA), and it offers coverage up to $250,000 per share owner, per insured credit union, for each account ownership category.
Beware: Not all banks and credit unions are insured. So it’s important to verify that they are, in order to protect your money and give you peace of mind before opening an account. You can visit the NCUA’s Credit Union Locator to find an NCUA-insured credit union near you. The FDIC’s BankFind Suite can help you determine if your bank is FDIC-insured, or you can contact the FDIC by phone to verify that your bank is a member.
Interest rates
The interest rates offered at banks and credit unions differ because of their profit versus nonprofit business models. In many cases, credit unions will offer significantly lower interest rates on lending products than banks that are trying to turn a profit, but higher rates on savings products. According to a 2022 report by the NCUA, five-year certificate of deposit accounts had an average national interest rate of 1%, compared to 0.74% for banks. The average interest rate on credit cards issued by credit unions stood at 11.32%, compared to 12.35% at most banks.
Fees
Credit unions often have lower fees than banks because they are not profit-driven as banks are. The downside: lower fees could translate to fewer available products. According to 2019 data from the Consumer Finance Protection Bureau (CFPB), overdraft and non-sufficient funds (NSF) revenue generated an estimated $15.47 billion worth of revenue for banks. Many banks charge fees to cover the cost of their services and transactions, or they may reinvest those funds into new product offerings.
Membership
Anyone can join a bank, but credit unions require a membership. This is because credit union members have voting rights and get a say in how a credit union is run. Banking with a certain institution doesn’t offer you the same rights.
Members of a credit union share a common bond, also known as the credit union’s “field of membership.” This common unifier among all members could be their employer, geographic location, or membership in a different organization. Eligibility requirements are different for each credit union, so be sure to verify that you meet those requirements when researching potential credit unions to join.
Pros and cons of credit unions
Credit unions are run by members and for members. As a result, fees tend to be lower to benefit those members. “Credit unions do not have the pressure from investors to maximize profits,” says Sultemeier. “They are able to take a more consultative approach when selling products and services.”
One potential con: For the consumer who likes to monitor their accounts online or via mobile application, a credit union may not be the best fit. Credit unions don’t typically offer as many high-tech banking tools as larger national banks do.
Pros and cons of banks
Banks may be for-profit, but they still have a lot to offer their customers. For the consumer who likes to have digital and in-person banking options, and a wider range of products, opening an account with a larger bank can give them the variety they crave.
“An advantage for banks is their ability to raise capital through sales of stock and other means which can make it easier for them to grow, expand and invest in large branch networks,” says Sultemeier.
How to choose between the two
When choosing a financial institution, the “right” answer will ultimately depend on your unique situation.
A few questions to ask yourself:
- What products will I need?: Consider the kind of account or accounts you want to open. Where can you secure the most favorable interest rates? Are there fees associated with that type of account? How do those fees vary between the two financial institutions?
- Do I meet the eligibility requirements? Banks do not carry the same eligibility requirements as credit unions, so the barrier to entry is significantly lower. However, if you’re considering a credit union, you’ll need to learn more about the credit unions you’re interested in joining and whether or not you meet their criteria.
- How do I prefer to bank? Larger banks will give you access to a wide network of ATMs and brick-and-mortar locations. Credit unions have large ATM networks as well, but may not give you the same face-to-face access.
“Chances are that most banks and credit unions will be able to meet the needs of the vast majority of consumers,” says Sultemeier. “Individual consumers may want to consider how important things like price, convenience, personal service, community investment, and others are part of their banking relationships.”
