Credit Unions vs. Banks: How to Decide, Pros and Cons
– Credit Union –
If you are to decide where to open your financial accounts, you may wonder: Should I go with a bank or a credit union? However, this article focuses on the differences between these two – credit unions and banks.
When deciding between a bank and a credit union, it is important to consider which works best for your particular financial needs.
While both banks and credit unions operate under similar laws and agencies regarding loans, mortgages, and safety, the customer experience you get can be rather different.
The overall differences between banks and credit unions can be confusing, even for the financially well-versed.
What Is a Credit Union?
Federally insured credit unions hold $1.45 trillion in assets and have about 30,000 ATMs spread across the country. They tend to be much smaller than banks, which can lead to a more personal touch: The average bank is about double the size of a credit union.
Unlike banks, they are nonprofits governed by their members, many of whom volunteer to serve as board members, committee members, or in other roles.
A credit union is very much like a bank and offers many of the same services. For example, you can get a checking account with a debit card and a savings account.
You can also invest in CDs and an IRA or get a car loan, a mortgage, a home equity loan, a credit card and other types of loans through a credit union.
Still, confusion over credit unions abound; many people falsely believe they must belong to the military or work for the government to join them.
Or that their savings will not be insured the same way they are in bank savings accounts.
Pros of Credit Unions
- Less rigid eligibility requirements.
- Lower interest rates.
- Deposits are insured in the same way as banks.
- Greater financial literacy resources.
Cons of Credit Unions
- Limited financial product offerings.
- Fewer physical branches.
How Bank Differs From a Credit Union?
The main difference between a bank and a credit union is that a bank is a for-profit financial institution, while a credit union is a nonprofit.
The main financial services a credit union offers – including loans, checking accounts and savings accounts – are also available with traditional banks.
Pros of Banks
- Resourceful online apps, tools, and features.
- Added convenience.
Cons of Banks
- Stringent eligibility requirements.
- Higher interest rates and transaction fees.
Credit Unions vs. Banks: Which Is Best for Investing?
Credit unions have the potential to have better deals due to the lack of outside investors with motives to increase profits without concern for customers.
This customer-driven approach translates to better loan deals, free checking accounts for all members, and higher paid interest on CD’s or savings. This translates to tangible benefits in your pocket.
Still, banks have better rewards programs, which is often a key factor for customers in deciding where to invest their money and get credit cards. Most banks such as Bank of America (BAC) – Get Report or Chase (CCF) – Get Report to have rewards programs with their credit cards that award customers points or sign-up bonuses for use.
But, while banks offer a variety of credit card reward services and cash-back deals, hardly any credit unions offer the same programs.
In fact, out of the reported 5,644 credit unions in the United States as of March 2018, only 61.2% even offer credit cards.
Given the lack of rewards programs, those customers who enjoy the benefits of credit card rewards may find banks are a better option.
Still, when contemplating an investment, researching interest rates, CD rates and loan rates is perhaps the best determiner of the right option for your financial situation.
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CD Rates, Loans, and Mortgages for Credit Unions
When it comes to CD rates, loans, and mortgages, credit unions often have the upper hand with lower fees. As of June 2018, Pentagon Federal Credit Union has a CD Rate (APY), with a 12-month term resting at 2.25%, while Marcus by Goldman Sach’s 1-year term rate sits at 2.3%.
While not a hard and fast rule, credit unions also tend to have lower fees due to their non-profit, customer-owned nature. Without investors to please and revenue to generate, credit unions can often offer lower fees on standard loans and mortgages.
However, credit unions frequently sell mortgages to third parties after they close, potentially leaving your mortgage in the hands of someone other than your credit union.
This means you will be communicating with your mortgage servicer, not your credit union. Yet, according to CUNA’s report, mortgage closing fees for credit unions average about $200 less than banks’.This may compensate for third-party interaction.
Still, in a survey done last year of the nation’s 50 biggest credit unions, “Bankrate found that 84% of credit union checking accounts come with no monthly maintenance fee,” according to Time.
While you may want to save the extra money in mortgages or fees, direct servicing by your bank may be a more comfortable option if you prefer direct communication.
How to Decide if a Credit Union or Bank Works Best for You
Prioritize aspects that are the most important to your banking and investment experience. Is great customer service a priority, or are easy-to-use banking apps and technology more important?
Is branch location and convenience higher on your list, or better interest rates?
Research your options and check out quotes from banks, credit unions, or online lenders to ensure you get your financial needs met.
Credit unions will likely offer you lower-cost services and better interest rate options for both loans and deposits. Banks will likely provide more services and products, as well as more advanced technologies.
You’ll need to take factors like these into consideration in deciding which type of institution will best serve your needs.
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