It’s a question few know the answer to, but many ponder: What’s the difference between a credit union and a bank? On the surface, both types of organizations seem to do the same thing. You give them your money and, when you need it again, they give it back.
Both credit unions and banks also offer other perks and services. You can turn to either institution when you find yourself in need of a mortgage or auto loan. You can also earn interest on any money you have tucked away in a savings account.
So, with all these similarities, what really is the difference between a credit union and a bank?
What Is a Credit Union?
Choosing which bank to trust with your money is never easy. But you also need to ask yourself one other question: Why not “bank” with a credit union instead?
Before you can decide which establishment is right for you, you first need to learn the difference between a credit union and a bank.
So, when you bank with a credit union, you’re not just a customer. That’s right. You’re also a co-owner. And that doesn’t just mean you get the privilege of a fancy title, either.
Because there are no shareholders expecting dividends and returns on their investments, all proceeds go right back into the credit union. That also means that all members have the right to vote on how this money is reinvested back into the credit union.
Most of the time, that translates into lower fees, higher interest on savings accounts, and other valuable benefits.
Credit Unions are Cooperative
Are you wondering how a credit union operates without an owner or investors? It’s actually quite simple.
You see, credit unions do have investors (just not in the same sense as a traditional bank). By investing their own money, normally in the form of a minimum savings account deposit, a credit union’s members act as the investors.
If you like, you can invest more than just your money into your chosen credit union. Members can run for appointment to the board of directors of their credit union, giving them even greater say over how the union invests its earnings.
Whether you invest a little or a lot, in the end, a credit union is built on cooperation.
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Credit Unions are an Identity
One other significant difference between a credit union and a bank is that most credit unions only serve certain people. On the other hand, banks will take almost anyone as a customer.
While credit unions offer an opportunity for all members to own a share of their banking institution, that doesn’t mean just anyone can join. Instead, most credit unions have a certain set of membership criteria that must be met.
For example, some credit unions only accept members who live within a certain area. Others, though, may only accept members who work within a specific profession.
In many cases, these limitations actually benefit credit union members by narrowing the scope of the union and how it invests its resources. When everyone shares a common interest, earnings and other resources can be used more effectively.
The Birth of the Co-op and the First Credit Union
To really understand the difference between a credit union and a bank, we need to take a step back in time to the very first credit union. For that, we need to visit the end of the 19th Century.
During the late-1800s, the cooperative movement was all the rage in Europe. This movement started when a group of gentlemen opened a cooperative store in Rochdale, England.
The store sold normal things like butter, milk, and eggs. But one key fact made it different than any other store of the time: instead of one owner, the store was owned by a “cooperative” of co-owners.
And this trend didn’t end with grocers and other retail stores. In 1864, the first modern credit union opened in Cologne, Germany.
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It wouldn’t take long for this idea to jump across the pond, either. In 1909, a credit union opened stateside in New Hampshire. Then, 10 years later, Massachusetts formally recognized credit unions and wrote legislation providing a framework for them to operate.
Shortly after, credit unions gained considerable favor when the Great Depression destroyed the trust most citizens had in traditional banks. While banks collapsed under the recession, credit unions remained relatively untouched by the economic collapse, and people turned to them in droves.
Today, the National Credit Union Administration oversees one hundred million credit union accounts within the United States. That adds up to one account for almost a third of the country’s residents!
What You Really Need to Know About the Difference Between a Credit Union and a Bank
Clearly, credit unions and banks share very little when it comes to their histories and guiding principles. In modern times, though, what is the practical difference between a credit union and a bank?
Ultimately, it boils down to how profits are created and used. However, the subtle differences between being a customer and a member can also have a major impact on your banking experience and long-term financial goals.
If you’re unsure which of these financial institutions is right for you, here are the factors to consider before making a decision:
Show Me the Money
Have you heard the saying, “Follow the money?” You probably have at some point in your life.
When it comes to understanding the difference between a credit union and a bank, you need to follow the money. Or, more specifically, how the money is handled. After all, these two institutions manage your money and make money for themselves in vastly different ways.
Let’s start with traditional banks:
Traditional banks are privately-held, for-profit ventures. In other words, banks exist almost exclusively to make a profit for their owner or shareholders. But how do they accomplish this goal?
Most of these earnings come from financial services, both for individuals and for businesses, offered by the bank.
Anytime you pay a fee or are charged interest by your bank, this money goes into the bank’s earnings. From overdraft fees to paying interest on a credit card, there are countless ways banks profit from their customers.
Now, let’s turn our attention to credit unions:
Since credit unions don’t strive to make a profit in the first place, there’s little motivation to charge high fees for basic services.
Of course, credit unions still need to bring in some earnings. If they don’t, there’s no way to pay the employees or cover the cost of their building. With that said, credit unions don’t feel the same pressure to maximize earnings from an owner or shareholder.
While no two institutions are alike, it’s easy to see why credit unions seem to care more about their customers than most banks.
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Jump in the Deep End
The next key difference between a credit union and a bank has to do with how your money gets managed.
At a traditional bank, your money effectively becomes the bank’s money. When you deposit money into a checking or other type of account, the bank turns around and invests that money themselves (in most cases, making a profit). When you later withdraw your money, it comes from a pooled reserve the bank keeps on hand.
If you paid attention during class when learning about the Great Depression, you might remember something called a “run.” So, what is a run? And what happens if there’s a run on your bank?
Since banks invest the money deposited by their customers, banks don’t technically have access to all of this money at once.
If most of the bank’s customers attempt to withdraw all their money at once, a bank run occurs. When this happens, the bank in question often closes down — whether the customers actually get their money is another question entirely.
A bank run might seem like something that only happened in the early 20th Century. But, in fact, this has recently occurred in both Greece and Venezuela.
Service with a Smile
Another major difference between a credit union and a bank is the quality of service. Since credit unions aren’t driven by profitability, many credit unions spend more on their employees than some banks.
In fact, according to a 2018 study of banking customers, 92 percent of credit union members said they were “very satisfied” with their experience.
Of course, many banks offer acceptable customer service. And some credit unions likely offer some pretty terrible service. But, in general, credit unions tend to reign supreme in this regard.
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Location, Location, Location
During your time learning about the difference between a credit union and a bank, you might think things are looking pretty strong in the credit unions’ favor. But there is one key area where banks come out ahead.
When you do business with a traditional bank, especially a regional or national chain, you’ll likely find branches all over the place. It’s not always that easy when you bank with a credit union.
Many credit unions have a very limited number of branches (some even only have one!). That isn’t a big deal when you’re home, but it can definitely turn traveling into a logistical nightmare.
Some credit unions have banded together to offer an extended network to their members. If your chosen credit union is a member of a shared branching network, you can visit any participating branch around the country.
Still, this isn’t as convenient as a national banking chain like Wells Fargo.
Choose the Financial Solution That’s Right for You
So which is better for you, a credit union or a bank?
When looking at the difference between a credit union and a bank, it may seem like credit unions are always the best choice. But if you travel often or like the flexibility of being able to find a branch almost anywhere, a large bank might be better.
That being said, many people prefer the approachability of a credit union to a traditional bank.
Whether you need a mortgage, to invest, or simple day-to-day banking, many credit unions offer more than a regular bank. In the end, though, the choice is entirely up to you.
Do you currently use a traditional bank or a credit union? Let us know your experiences in the comments below!
