When choosing a financial institution, two primary options often come to mind: banks and credit unions. While both provide essential financial services, their structures, purposes, and benefits can differ significantly. Understanding these differences is crucial for anyone looking to make the best decision for their financial needs.
1. Ownership Structure
One of the most significant differences between banks and credit unions is their ownership structure. Banks are typically for-profit institutions owned by shareholders.
These shareholders may not be customers of the bank, but they have invested in the company and expect a return on their investment. As a result, banks often focus on maximizing profits to benefit their shareholders.
On the other hand, credit unions are not-for-profit organizations owned by their members. When you open an account with a credit union, you are not just a customer—you become a part-owner of the institution. This cooperative model means that credit unions prioritize the interests of their members over generating profit for outside investors. Any profits made by the credit union are typically reinvested back into the organization, allowing them to offer lower fees and better interest rates on loans and savings accounts.
2. Eligibility and Membership
While banks are open to anyone who wants to open an account, credit unions have membership criteria that must be met. These criteria are usually based on factors such as where you live, work, or attend school. Some credit unions are open to employees of specific companies, members of certain organizations, or people living in particular geographic regions.
However, eligibility requirements are often more flexible than they appear. For instance, some credit unions allow membership through a small donation to a partnering nonprofit or organization. Once you qualify and become a member, you have access to all the services the credit union offers.
3. Service Philosophy
The mission of a bank is to generate profit for its shareholders, which can sometimes lead to higher fees and interest rates. Banks aim to provide a return on investment to their shareholders, which may come at the expense of their customers.
Credit unions operate under a “people helping people” philosophy, focusing on providing the best possible service to their members rather than generating profit. Since they are not-for-profit, credit unions often offer lower fees, better loan rates, and higher interest on savings accounts compared to banks. Any surplus earned by a credit union is typically returned to members in the form of reduced fees, higher savings rates, or improved services.
4. Interest Rates and Fees
One of the most attractive differences between credit unions and banks is the pricing of services. Credit unions tend to offer better interest rates on loans and credit cards, as well as higher interest rates on savings accounts and certificates of deposit (CDs). Additionally, credit unions are known for charging lower fees or, in some cases, no fees for services that banks may charge for, such as account maintenance, ATM use, or overdrafts.
Banks, especially larger ones, often have more complex fee structures. Fees for services such as checking accounts, overdrafts, and ATM withdrawals can add up, and interest rates on savings accounts are often lower than those offered by credit unions.
5. Customer Service and Community Focus
Credit unions are often praised for their personalized customer service. Because they are community-focused and member-owned, they tend to offer more direct and attentive customer care. Their smaller size allows them to build stronger relationships with their members, and many credit unions go out of their way to understand the unique financial needs of their members.
Banks, especially large national or international institutions, often handle millions of customers and may not offer the same level of personalized service. However, many large banks invest in technology to offer convenience, such as mobile banking apps and online services that make banking accessible from anywhere.
Credit unions, while generally smaller, often have strong ties to their local communities. They may sponsor local events, provide educational resources, or offer programs aimed at improving financial literacy in their communities. This local focus strengthens the bond between the credit union and its members.
Watch the video above to learn more about the difference between a New Mexico credit union and a bank!.
