When it comes to financial services such as checking and savings accounts, personal loans and basic investments, a person can turn to either a bank or a credit union. Yet many consumers recognize little difference between the two, save for their type. Since each provides similar services in similar ways, pinpointing a reason to choose one institution over the other isn’t immediately obvious. So what, then, is different between the two? Let’s take a closer look to illustrate the advantages of each.
Not for Profit
Credit unions are, by their nature, not for profit. That means they can pay out more for account interest and charge less on loans and credit card services, since they need only maintain the overhead needed to run the business. There’s no requirement to provide return for shareholders. Any excess revenue is turned back into the credit union rather than distributed as dividends.
Membership and its Privileges
Credit unions structure as cooperatives. Customers who make deposits are actually owners buying into the credit union itself, with voting privileges in the operation of the credit union. The membership aspect does restrict who can use any one credit union. For example, a teachers’ credit union may be restricted to teachers in a particular school district and a credit union started to benefit union members in a particular industry might be limited to that union’s members and families. Other credit unions may have more relaxed membership requirements, such as residence in a particular city. The National Credit Union Administration provides a utility to find credit unions across the country.
The CU Advantages
Once a person finds a credit union for which they qualify, they can benefit immediately. Some of the advantages available to members include:
• High Interest Rates: Returns on deposit accounts typically run between 4 to 10 times that of commercial banks. Some online banks provide similar interest earning, but of bricks and mortar institutions, CUs provide the best earning potential.
• Lower Interest Rates: On loans and credit card services, CU members usually pay a point or two less than banks for loans, cards and mortgages. Over the life of a medium or long term loan, this may produce significant savings.
• Service Fees: Without the need to generate profit, credit unions can charge reasonable fees for services that traditional banks regard as profit centers.
• Customer Focused: The principle stakeholder in a commercial bank is the shareholder, motivated by return on investment, the bigger the better. This motivation is contrary to the needs and desires of the everyday bank client. With credit unions, on the other hand, each client is a shareholder, so customer service is far closer to the chief aim of the credit union company.
Credit unions do lack the presence of commercial banks in number of locations – including online services – and variety of products offered. Yet, since a person can split accounts between banks and CUs, many can benefit from a credit union association.