You need to keep your money somewhere that's safe and gives you easy access. Since it's not a good option to keep your cash in a cookie jar in your kitchen, you're going to need a bank or credit union. There are advantages to both, so understanding what the differences are is crucial to making the best decision for your situation.
What is a credit union?
Credit unions are nonprofits that promote the principle of serving a community of people that are tied by a "bond of association". This association can be based on a number of factors such as the locale, faith, and employer. So you can't necessarily join just any credit union, unless you meet their association requirements.
Banks are typically owned by investors, so they operate in the best interest of their shareholders. Since credit unions are essentially owned by their customers (members), they operate differently from banks.
Advantages of a credit union
Because their purpose is to serve the community, the financial products at credit unions tend to offer discounted loan rates and higher interest rates on deposits. Many will also provide a small dividend, or profit-sharing, to its members. The fees also tend to be lower for things like overdrafting on your checking account.
Customer service is also a large focus of credit unions, so they tend to be very friendly and promote personal interactions. If you have less than perfect credit, you may have a better chance of qualifying for loan due to the stronger relationship you can gain at a credit union.
How is a bank different?
As mentioned before, banks tend to be owned by shareholders who want to make as much profit on their investment as possible. You will likely not earn as much interest on your money at a bank or receive the lowest loan rates.
Even smaller banks will likely offer more branches than a credit union as well as an expansive network across the country. So, you will find it easy to get access to your cash when traveling or if you move.
Technological advances such as new apps for your phone will also roll out quicker at a bank. The technology is just usually better if you compare side by side the online banking experience between a bank and credit union. Since banks want to maximize profits, they strive to put as much of their services online to reduce expenses from higher cost channels like calling customer service or branch visits.
Will my money be safe?
Either a bank or credit union will be able to keep your money safe. Banks and credit unions are insured, so if something happens to them your money can be replaced in most cases.
Banks uses the Federal Deposit Insurance Corporation, better known as the FDIC, to provide government backing up to $250,000 per depositor for every institution. Credit unions are covered by the National Credit Union Share Insurance Fund (NCUSIF) for credit union deposits. The NCUSIF also covers up to $250,000.
It's possible with either a bank or credit union to be insured for more than $250,000. Your institution may count your checking account separately from a certificate of deposit account. You will want to check with your bank or credit union on this to make sure you are spreading your funds appropriately.
One piece of information that is important for you to uncover if you are considering the credit union route is if they are state chartered. That means they offer private insurance coverage, but it's not as safe as what the NCUSIF offers.
Making the choice
Deciding whether to go with a bank or credit union is ultimately going to depend on what matters the most to you. Consider what type of accounts you want. Banks and credit unions both offer your basic checking and savings accounts. When it comes to more sophisticated financial products like trustee services, you may not be able to get them from a credit union.
Are you considering a loan product to pay for a car, home, etc.? Perhaps you are still working on building or improving your credit score. You will have a better chance of qualifying for a loan and a better interest rate at a credit union.
Convenience is another factor to strongly consider when making a choice between a bank or credit union. Is it more important for you have to access to branches and ATMs? Do you travel often for work? A bank will give you more access to your funds in this case.
You will also want to consider the fees associated with your options. Once you have a list of your top choices, look at what fees they charge. You will also need to decide which fees could be relevant to you. For instance, if the bank you're looking at requires you make a certain number of debit purchases each month and you make more transactions than the minimum, that's probably not a deal breaker.
Side by Side Comparison
Here are the differences between a bank and a credit union laid out for an easier comparison of their key features:
|Owned by Shareholders||Owned by Members|
|No Affiliation Necessary||Must have Affiliation to join|
|Not as focused on customer service||Focused on providing great customer service|
|More Branches, accessibility||Fewer Branch locations and accessibility|
|Offers more sophisticated financial products||Offers fewer financial products|
|Fees and interest rates on loans are typically higher||Tends to have fewer fees and lower interest rates on loans|
|Technology is more sophisticated||Technology tends to lag behind|
|Backed by the FDIC up to $250,000 per account||Backed by NCUA up to $250,000 per account|