On the surface, banks and credit unions look very similar. They both take customer deposits in the form of savings accounts, certificates of deposit, and checking accounts. They both also lend money in the form of mortgages, home equity loans, auto loans, and credit cards. They both have branches, electronic banking, and many of the services that facilitate the savings, transfer, and lending of money.
But a deeper examination reveals profound differences that impact the rates that you receive as well as the customer service provided to you. Here are the key differences between a bank and a credit union.
Who Owns the Institution?
Banks are owned by private individuals, corporations, or shareholders. These entities are entitled to receive any profit generated by the bank in the form of dividends or stock appreciation. Thus, the institutions exist to maximize their shareholder value in order to pay out more to their investors. They generally do this by best serving their customers but there are times when the goals of the shareholders and the goals of the customers are not in synch. For example, a bank could decide to raise fees or cut services in order to maintain its profitability even though it knows that by doing so it will negatively impact its customers. Or a bank might decide to increase the risk it takes on its loans in order to initiate more lending and generate more income.
A credit union is owned by its customers. Customers become members who elect the board of directors in a one member, one vote system. Thus, a member with $100 in the credit union has as much voting power as a member with $1,000,000.
The board of directors are responsible for setting rate policies, hiring, and overseeing the management of the credit union. Earnings are usually returned to members in the form of higher deposit rates, lower fees, and lower loan rates.
Who Can Do Business with the Institution?
Banks generally allow anyone who can walk in the door to deposit money or apply for loans. Some banks may focus more on a certain community (community banks) but in general, there is no pre-requirement to do business with a bank.
The same is not true with credit unions. In order to do business with a credit union, consumers must become members. Federal law mandates that credit unions cannot do business with the general public. Membership requirements are often quite strict. For example, some credit unions will only serve employees of a certain company or government agency, some will only serve individuals who live in a certain area, other will only serve customers who belong to certain interest groups.
FDIC Versus NCUA
Banks are regulated by the Federal Deposit Insurance Corporation (FDIC) while most credit unions are regulated by the National Credit Union Administration (NCUA). Both currently insure an individual's accounts in an institution up to $250,000.
While banks pay local and federal taxes, credit unions do not pay federal taxes. Some critics of credit unions complain that this provides a public subsidy to credit unions and that it gives them an unfair advantage over local and community banks. This factor may or may not matter to you in making a decision. On the one hand, it provides credit unions with a cost advantage, which is passed on to its members. On the other hand, we, the taxpayers are ultimately paying this out of our pockets.
In general, credit unions have more modest operating budgets than banks and tend to invest less heavily in technology and customer service. Thus, their online banking applications, ATM networks, and other customer facing services are often not as developed as banks.
Finding a Credit Union and Bank
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