Banks vs. Credit Unions: Which is Better?

With all of the discussion around the recession and protecting your assets, I thought it important to cover the topic of banks vs. credit unions. Many people have an idea of which is better and why, while others think they’re the same. However, it’s important to understand the difference and how they can benefit you.

For profit vs. not-for-profit

First of all, there is a big distinction between banks and credit unions in that a bank is for profit, meaning they operate to make income. Credit Unions, on the other hand, are not-for-profit, meaning any income they earn is given back to the members.

So, how does this benefit you?

Well, look at it this way. The owners of a bank are the stockholders; therefore, a bank’s primary goal is to make their investors money and keep them happy. The way a bank makes most of its money is in fee income - those overdraft fees that everyone hates to pay! There are other fees associated with this income, but the real bread and butter is in the overdraft fees. If you’ve ever had these fees with a bank, by your own fault or not, then you know how difficult it is to get help with them.

I’ve worked for two major banks in my banking career and both of them are very different in their practices, but one thing they have in common is that overdraft fees are RARELY returned and when they are it’s only if the bank has made an error. If you made a mistake, well, we feel sorry for you but there isn’t much we can do. Have to keep the investors happy, see? Now, there are exceptions to the rule, but it really boils down to how much money you have in the bank. Obviously, refunding fees is not to the benefit of those who need it.

Conversely, the owners of a credit union are its members. When you open an account with a credit union, you become a shareholder and part owner of the credit union. Fee income works the same way; however, a credit union uses the income to give back to the members in the form of lower rates on loans and higher dividends for savings and certificate’s of deposit (these are just CDs, but the NCUA is funny about actually calling them CDs). So, a credit union’s primary goal is to keep all of their members happy because all of them make a difference.

I work for a credit union now and I can tell you from personal experience that it is a much better environment. Where before I was told that someone walking in with thousands of dollars was more important than someone with only hundreds (which is ridiculous by the way, we can never presume we know how much money a person actually has), now I’m told that everyone is equally important and should be treated exactly the same way. From a moral standpoint, this just feels better. But, from a consumer standpoint, this is good business.

Insurance

Many people worry that a credit union isn’t FDIC insured. Well, they’re right, it’s not. A credit union is insured by the National Credit Union Administration (NCUA). They are an independent federal agency that charters federal credit unions and supervises their activities. The NCUA, and by extension the federal government, are still guaranteeing funds to members whose credit union goes under. However, have you ever looked at the statistics for the number of credit unions that have actually gone belly up? The number is significantly less than that of banks. The reason for this is that credit unions prefer not to touch the NCUA fund unless they have no other choice. In other words, it is a very last resort. What usually happens is that surrounding credit unions will try to adopt the failing credit union into their charters so that members are not affected.

Another plus to credit unions is that they don’t try to compete with one another as do the bigger banks; one of the perks to being non-profit. Instead, they work in tandem and form alliances that benefit their respective members. For example, in Austin, Texas there are about seven credit unions that form the Austin Alliance whereby each participating credit union’s members can use any of the other credit union’s ATMs for free. This benefits everyone and it saves the credit unions – and their members – money by not having to install more ATMs. There are many other benefits to this type of an alliance and it really focuses on the needs of the members, not just a select few.

Rates

When most people consider the difference between banks and credit unions they think of rates. Historically, credit unions have offered better rates on everything from savings and CDs to loans. Incidentally, I saw a commercial the other day for WaMu with a bunch of actors dancing around because “their interest rates were so low.” I watched the commercial to see what the rate was and had to laugh. The advertised rate was 6.21% for a five year home equity. That’s a great rate? In times where rates are falling so quickly? The credit union I work for is offering 4.99% for five years.

In some cases banks will offer a really good rate on their checking or savings accounts. There are a couple of reasons for this. First, it’s a teaser rate to get people over. Remember, they are for-profit and serve their investors, so the more people they have, the more money they can make. It’s all a numbers game with them. Secondly, banks that need deposits in order to meet their reserve requirements with the Fed will often bump up their rates to attract people. Every financial institution is required to keep a certain amount of money on deposit with the Federal Reserve. If their deposits aren’t meeting that number, then they have to allocate funds from elsewhere, so they will typically bump their rates as a promo to get people in the door.

Credit cards are another area where banks and credit unions differ. As with any other rates, historically, credit unions have been lower. However, not all credit unions offer credit cards because it is fairly expensive to carry a portfolio. If they do offer the credit cards, it is rare that they are handled in house.

There’s been some talk of great rates versus points and rewards with credit cards. It seems like large banks give better rewards, etc. Here’s the thing, it doesn’t matter whether it’s a bank or a credit union that offers the card, there is ALWAYS going to be a trade off for points and rewards over the rate. There are the cards out there that offer the teaser rate and you get rewards, but check out what the rate is after the teaser rate. The difference is in the cost for the company providing the card. If they are giving you free stuff through points and rewards, they recoup a small percentage of their costs through the interest rate. Conversely, if you’re getting a plain Jane card with nothing on it, then the rate is lower because that card still costs less to maintain on the company side – be it a bank or a credit union.

Personal Service

This is largely a matter of perception, but typically you can find more personalized service at a credit union than a bank. Actually, I should clarify this because if you have money with an institution, you’ll get personalized service no matter which route you go. But, think of the last time you walked into a place and everyone knew your name. It’s a good feeling to walk in and have someone know who you are. As I mentioned before, it’s a numbers game to the big banks, so it’s hard to remember everyone that walks through the door. Occasionally you’ll find that rare diamond in the rough that goes beyond the expectation of a large bank, but they are few and far between.

However, if you walk into a credit union the atmosphere is usually different – not always, but usually. For instance, the credit union I work for doesn’t even look like a banking institution. We look more like an internet cafe. The lobby is open, members are welcome to sit and read – we provide books and newspapers – they can watch TV – we provide three different large screens for members to watch – they can bring their laptops in and use the free wifi, and we even offer bottled water and coffee – oh, and free candy! The tellers aren’t tied down to the counter, in fact, we issue laptops so that the employees can mingle and interact with the members. We know our members on a first name basis and it is literally like walking into Cheers because we may be helping someone, but we still look up and say hi. It’s infectious too! The members get to know each other and then everyone is welcoming everyone. That’s different! That’s personal service. I’ve never seen the like at any other financial institution I’ve worked for.

I’m a bit partial to my credit union, but I don’t deny that there are some things that banks are better suited for. Whether you choose a bank or a credit union, knowing the difference can really help meet your needs. And with the economy the way it is, your financial institution will be important.

Get to know who you entrust your money to!

22 thoughts on “Banks vs. Credit Unions: Which is Better?”

  1. Bravo, bravo!! I have been trying to make the argument that credit unions are better because they’re owned by the members to a lot of people recently, but you’ve made the points much better than I ever have :D This is really well done, and I am so glad you’ve brought all the info together into one place. Thanks!

  2. Hey Jonathan,

    It helped a lot in understanding the difference, plus points and drawabacks which exisit for Credit Unions and Banks. Thank you very much for this posting.

    -Thanks
    Sandeep

  3. I would like to have articles on loans, loan offerings, their types, loan processing methods, and everything related to loans adopted by credit unions. Along with that something good related to deposits. If you can please do that, it would be helpful. I am novice in BFSI domain, so looking for a scholar’s views and sharable knowledge.

  4. I’ve been using a credit union for my primary checking account since I was sixteen years old and will continue to. It’s unfortunate that the credit union that I’ve always used and like (sat on the board of directors for a couple non profits with the Regional Manager even) is only located in San Diego and not back here, so only my personal account is back there now.

    If only more credit unions expanded into extensive business checking options.

  5. One interesting issue with credit unions is that they can drop their NCUA insurance coverage (if they’re state chartered and this depends on the state). They do have to get approval of their members. One of my credit unions in Texas tried to do that last year. Its board had wanted to replace NCUA coverage with private insurance from American Share Insurance (ASI). Fortunately, the members voted it down. In today’s shaky environment, I definitely feel better with federal deposit insurance over private deposit insurance. I think most of the members felt the same way.

    Patelco Credit Union in California, one of the nation’s largest credit unions, did the opposite this year. They replaced their ASI coverage with NCUA coverage.

  6. Interesting article, however, all of your points are anecdotal; not all banks large and callus, nor are all credit unions small and friendly. Banks and Credit Unions both offer similar products, and both pay commissions to their employees for expanding business, so in either case it is very possible to receive financial advice in the advisors best interest.

    Also, not-for-profit companies still need to maintain business in their market and are susceptible to any “undesirable” practice of a for-profit company. ie. In the overdraft fee example… credit unions may use fee income to “benefit” the customer by lowering loan rates or raising deposit rates; however, this simply means that those customers with the largest loan and deposit balances are the ones who benefit most, which results in the same banking phenomenon of favoring high value customers.

  7. I work for the Chicago Police and we have the chicago patrolmens federal credit union. It is nothing like the credit union you are describing. It is another bank. Its loans do not compare to other banks and their interest rates on savings are just above some banks but not all. I closed my account with them recently and when they asked why, I told them ” you arent a credit union. you dont care of your customers. you are just another bank and not a very good one.”

  8. I think the convenience factor trumps all for me. I NEED to stay with Wells Fargo because in my experience credit unions have less options and features online and the number of ATMs. Depositing cash and checks at the ATM, hours, lines…. I can go on but maybe I just got unlucky with Petelco Credit Union and Verity over the years.

  9. You completely forgot to mention a mutual savings bank. The best of both worlds. Owned by the customers but offers all of the extra benefits of a bank in addition to things such as processing savings bonds.

    I’ve worked for two banks as well. One a shareholder bank and now a mutual savings bank(very few and far between to find). I prefer where I’m at right now. Oh, and I know a very large percentage of my customers by a first name basis.

  10. @Andrew – I’m sorry to hear that you had trouble with the credit unions you’ve dealt with, but it could be that you were working with smaller credit unions. Convenience is certainly a huge factor when it comes to banking; however, credit unions are making things more convenient for members. The credit union I work for began as the IBM employees credit union but has now opened their membership base. But, being a techie credit union means we keep up with a lot of the conveniences of online banking like bill pay, ACH transfers, etc. We offer a free software that works like Quicken or MS Money and mobile banking. We even have Instant Deposit Online – one of only three financial institutions in the country to offer this product. So, progress is in motion.

    @JC – Mutual savings banks are few and far between, but you’re right, they’re pretty much the best of both worlds!

  11. If credit unions were so much better then everybody would be using them instead of banks. Fact is their not. That would be the answer to which you should use. Whoever said credit unions offer better service is just a salesman making a sales pitch and I’m certainly not dumb enough to buy what you’re selling. The service depends on the employee, not the branch.

  12. I’m not trying to sell anything, I’m giving my opinion based on the fact that I’ve worked at both banks and credit unions. I think credit unions are better. I agree both have their faults and service is dependent on the employee, but typically, walking into a credit union you do get better service because there is less pressure to sell than there is in the bigger banks. There it’s all about numbers. However, I also said that the bigger banks serve their purpose too.

    But, here’s another way to look at it. The NCUA – which is who insures credit unions – isn’t anywhere near insolvent. In fact, there aren’t too many credit unions that shut down for poor choices, or are seized and control giving to another credit union. The FDIC is going to have to start borrowing from the Fed in order to cover the deposit requirements it needs to meet. Fortunately, they were able to get Chase and Citigroup to take over WaMu and Wachovia respectively, but the point is, banks are far from being done with their failures. There will be more to come. So, in my professional opinion, credit unions are better. Take it or leave it.

  13. My Credit Union is so much better than the bank that I used to have my accounts with.

    It is so nice ringing them up and having the person that answers the call be able to handle pretty much any query I have. With my old bank I used to get bounced around different departments before I could get what I wanted.

    The Credit Union fees are also amazingly low. Big banks try to charge fees for anything they can think of.

    Our mortgage rate was also significantly lower than any of the big banks when we applied for our loan (I haven’t actually compared recently though).

    I also feel they will always try and do the right thing by me, rather than trying to maximize their profits and that’s a nice feeling to have.

  14. Now don’t throw all the banks in one big fee encrusted greedy box. Having worked for primarily small, community based banks I can say that there is a big difference between the small and large banks. Small community banks are typically owned by members of the community (local shareholders and employees) and are founded by people that have invested their lives and their money.
    Their fee structure is comparatively lower than most. In most cases, customers know their branch management by name and decisions about fees and loans are still made by people and not completely dictated by some company policy. At my bank, a lot of the customers know the CEO by name and have his phone number. Loan decisions are made on a case by case basis in front of a committee. Not a machine with a scoring matrix. When we invest the funds on deposit wisely, we can afford to give the excess back to our customers and our employees through higher deposit rates, lower loan rates and better salaries.

    Now, I am not trying to sell banks to credit unions or vice versa. Just making a distinction. I have absolutely nothing against credit unions and (shock) I actually belong to one and love it. I have found that credit unions are similar in many ways to small banks. Because they generally strive for the same things. Better service, convenience, luring customers away from the big fee banks and growing their customer bases.

    In summary, if you want to go where everyone knows your name, speak with someone that will WANT to HELP you and don’t want to get killed with fees, go to a credit union or a community bank.

  15. @ Ned – I’m not disagreeing with you, but the fact remains that even at your small community bank, you’re still for-profit. Therefore, fees are a major source of income for your bank. You may not abuse it to the extent that the larger banks do – case in point, take a look at Bank of America’s new fee structure – but fee income is still a large part of the equation for you. I do happen to agree that community banks are better than big banks any day, though!

  16. Well, I’ve been with CU’s ever since I started, so I personally cannot talk them down. But fact of the matter is, every complaint I’ve ever heard from my friends were in fact “bank customers.” I had a friend who was a Wells fargo customer, he set his debit card to “decline” upon lack of funds. Somewhere along the line though (I’m assuming since shareholders have a big call in all bank matters) this was changed, at that point he incurred over 500 dollars in overdraft fees! When he called they told him he was shit out of luck. Granted banks have their so called “pros,” but thus far I’ve seen the con’s cause more grief than the pros could ever make up for! All in all, lower tier to middle tier workers can always rely on CU’s, but the big banks clearly rely on the highest tier money makers to keep them going!

    Dan

  17. Jonathan,

    This is a fairly good article discussing the benefits of a credit union.

    I disagree on one point. If a bank is trying to meet reserve requirements, they don’t want or need more deposits, they want less. At least in the way that most people reading this article will understand deposits, which is in the form of checkable or demand deposits. Bank reserves need to be kept in order to cover 10 percent of demand deposits on a daily basis. If the bank acquired more demand deposits, it would need even more reserves to cover those deposits, thus exacerbating the original problem. The bank needs to keep cash on hand to cover these demand deposits, which cash cannot come from the deposits themselves. The bank could increase borrowing from the Federal Reserve or from other banks in order to maintain the amount of required reserves. The point to getting more demand deposits is that it gives the bank more money with which to make loans.

    Overall this is a fairly good article discussing the positive aspects of credit unions while not discussing any of the drawbacks, and not discussing any of the “things which banks are better suited for.” I would love to see another article pointing out the other half of the title of this article. Namely, the downside to credit unions and the positives to banks.

  18. As a high school senior about to enter college all I can say is THANK YOU for this information!!! It is easy to understand and super helpful. I currently bank at an institution but will be checking out the credit union in town sometime soon. Thanks again for finally making it (somewhat) easy to understand.

Leave a Reply