What is a credit union?
A credit union is a not-for-profit financial institution owned by its members (like you). Since credit unions don't need to show a profit, their sole purpose is to offer their members the best rates possible.
Credit unions are smaller than banks and limit membership to certain groups of people. They might all be employees of the same company, followers of a specific religion, residents in a certain geographic location or members of an civic organization.
As a member, you can vote on your credit union’s policies and influence how it is run.
Credit unions: Pros
Favorable interest rates. Since credit unions are not designed to make a profit, they typically offer higher interest rates on deposits and lower rates on loans. In the first quarter of 2021, credit unions offered the best rates for almost every type of mortgage, checking account, savings account and certificate of deposit, according to the National Credit Union Administration rate report.
Lower fees. The nonprofit nature of credit unions allows them to keep fees as low as possible. For example, unlike banks, many credit union checking accounts have no minimum account balance requirements or monthly maintenance fees.
Better customer service. Credit unions prioritize community and personal attention. Since policies are voted on by members, you are more likely to receive services tailored to your needs. You can also develop a personal relationship with branch managers and loan decision-makers, which may help you secure a loan.
Security. Credit union accounts are insured up to $250,000 by the National Credit Union Administration (NCUA). If you need higher coverage limits, you can often open multiple accounts.
Credit unions: Cons
Outdated technology. Since the goal of credit unions is to charge you as little money as possible, they have less of a budget to constantly roll out new apps and technology. That said, if you find one that offers the basic online services you use the most, you may not need all the latest bells and whistles.
Limited locations. Credit unions are smaller and more focused on a tight-knit community. That means there are naturally fewer branches and ATM locations. To solve this problem, many credit unions have joined forces to create the CO-OP Shared Branch and ATM network. If your credit union is part of a co-op, you can use branches and ATMs from all other credit unions in the co-op nationwide.
Limited membership. Each credit union has specific membership eligibility requirements called a “field of membership”. For example, the Navy Federal Credit Union accepts current and retired members of the armed forces, their families, household members and Department of Defense personnel. That said, nowadays larger national credit unions only require you to be part of certain easy-to-join organizations. For example, to join Alliant Credit Union, all you have to do is become a member of Foster Care for Success by donating $10.
Limited financial products. Most credit unions offer checking accounts, savings accounts, certificates of deposit, basic credit cards and various loans. But they don’t offer the wide array of financial products you find at banks.
What is a bank?
Banks are for-profit organizations owned by investors. Unlike a credit union, the main goal of a bank is to make money for the investors.
Banks do not restrict eligibility to certain groups of people — anyone who lives in a bank's serviceable area can open an account and become a customer.
And the keyword here is "customer." Unlike with a credit union, you are not a bank "member," and you have no say in bank policies.
Banks can be broken down into online-only operations and brick-and-mortar institutions. Online banks are completely virtual and have no physical location. While they cannot offer face-to-face service like brick-and-mortar banks, their lower overhead allows them to offer better rates.
More locations. Big banks offer more branches and ATMs than credit unions. For example, Chase has over 4,700 branches and 16,000 ATMs — making it more convenient to access your money wherever you are. That said, as technology advances, the need for in-person banking is gradually decreasing.
More financial products. Banks are more likely to offer money market accounts, investment accounts, wealth management services and a wider range of credit card options.
Better technology. Banks have more funds to invest in fancy websites, convenient apps and other tech to make your life easier. Just remember, the money to develop this technology comes out of your pocket via higher fees and less favorable rates.
No field of membership. Some small regional banks require you to live in the same state as the bank. But other than that, banks do not have special eligibility requirements to join.
Security. Bank accounts are insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). For higher coverage, you can split your funds between multiple accounts.
Higher fees. Since a bank’s main objective is to make money for its investors, they charge higher fees. For example, checking accounts often charge fees if you do not maintain a minimum balance in your account. Overdraft and bounced check fees are also often harsher in banks than credit unions — especially with non-premium accounts.
Worse rates. A bank’s for-profit objectives naturally lead to less favorable rates than credit unions. That said, online banks offer better rates than brick-and-mortar banks.
Less flexible. Banks have strict rules and protocols set nationally by a board of directors. This makes them less flexible than credit unions where you have a say in the rules. This rigidity — paired with corporate, profit-focused policies — is a recipe for customer service issues.
Why choose a bank?
Banks make the most sense if you value convenience over price. You may pay more in fees and interest rates, but you have access to more financial products, better technology and more branches and ATMs.
If you take advantage and actually use all these extra features, storing your money in a bank may be worth the price.
Why choose a credit union?
Credit unions are designed to prioritize their members. If you want favorable rates, low fees, great customer service and an organization that has your best interests at heart, a credit union is the way to go.
This is especially true if you don’t need all the bells and whistles that banks offer.