One of the findings from our March 2022 survey was that approximately 75% of Americans use a bank for their primary financial services activities while 25% use a credit union. Clearly banks are the default option for many people when deciding where to shop for financial products and services, but does this make sense? If you’re considering opening a checking or savings account, or if you’re applying for a mortgage, should you do so with a bank or a credit union? As with most decisions, having a comprehensive understanding of the available options is always going to be recommended – it is indeed one of the rare situations where less isn’t more and in fact more is more. Starting with a brief definition of both types of institutions, this article provides an in-depth comparison of credit unions and banks.
Quick Definitions: Credit Unions vs Banks
Banks are companies that are in the business of accepting deposits from customers – which most of the time are consumers – and then using the deposited funds to provide loans to other customers. These loans could be mortgages, auto loans or personal lines of credit. Credit Unions work very similarly – they are also institutions, and they also accept deposits from consumers and using those funds provide lending products including mortgages, auto loans and lines of credit. Some of the major differences between them surrounds their institutional objective, who they provide services to and their ownership structure. The below table is a high level summary of the starting differences between the two.
Banks Are Profit-Driven, Credit Unions Are Not-For-Profit
While banks might be privately-owned or public entities that trade on stock exchanges, they almost always exist in order to generate profits for their investors. Credit Unions are non-profit institutions that exist to provide financial services at an affordable cost to their members. This is an important distinction when you think about how products and services get priced, and how fees get determined at banks vs. credit unions. We touch on this further below.
Credit Unions Only Serve Their Members
In addition, while banks typically will accept deposits from pretty much everyone, and provide loans to everyone that meets their financial lending criteria, credit unions generally will only grant loans and provide services to people that have joined the credit union. In order to join a credit union you have to meet their eligibility criteria, which is also known as being within the credit union’s field of membership. For example, these are the eligibility requirements from three credit unions:
- Ontario-Montclair School Employees – in order to join this credit union, members must either be employees of the Ontario-Montclair School District, employees of the Ontario-Montclair Teachers Association, students enrolled in the Ontario-Montclair School District or immediate family members of members of the credit union.
- Our Credit Union – only people that live, work, worship or attend school in the state of Michigan are eligible to open an account with the credit union.
- Klamath Public Employees Credit Union – only people that live, work, worship or attend school in Klamath or Lake County, Oregon are eligible to join.
As mentioned earlier, banks have no such restriction and tend to only have financial requirements when it comes to who they give accounts to or approve loans for. Although the member eligibility requirement means that any given credit union is only going to be available to a subset of the population, the criteria tends to be broad enough to allow pretty much anyone to find a credit union that they are eligible to join. For example, a popular form of eligibility is where you live or work, and this can be as broad as a state or multiple states. Most states and territories in the United States have multiple credit unions and so that leads to ample opportunity to find one that you are eligible for.
Credit Unions Are Owned By Their Members
Banks are typically owned by their investors who might be private or public investors. Credit unions on the other hand are member-owned. This means that once you become a credit union member who have a fractional ownership of the institution. This is a unique characteristic of credit unions as it means that the incentive of the institution is aligned with its customers who are also its members.
Differences in Products Offered by Credit Unions vs Banks
In general, when it comes to the everyday financial products such as checking and savings accounts, mortgages, credit cards and auto loans, there is not much difference between a bank and credit union. Both offer each of the aforementioned products to their customers and members. However, banks will sometimes have additional products such as brokerage accounts or insurance products which the average credit union is less likely to offer. That said, in many cases the products offered will be similar between banks and credit unions. Despite this, one of the interesting findings from our recent survey was that credit union customers tend to have more products with their credit union than a bank customer has with their bank. Specifically, we found that on average credit union customers had 2.9 products with their credit union while a bank customer had 2.3 products. We also found that credit union customers were much more likely to have mortgages, credit cards and auto loans with their credit union than a bank customer.
Are There More Bank Options Than Credit Union Options?
As of this writing there are 4,817 banks in the United States that are insured by the Federal Deposit Insurance Corporation (FDIC). In terms of credit unions, there were 4,942 federally insured credit unions as of December 2021. So when it comes to federally insured institutions, there are actually more credit unions in the country than banks. The figures are close enough for us to conclude that there’s not a meaningful difference between the number of banks to choose from and the number of credit unions. However, because the majority of credit unions won’t accept just anybody, by definition there are going to be fewer credit union options to the average consumer, than banks.
How Do Credit Union Interest Rates Compare With Banks
How much a loan is going to cost is perhaps one of the most important questions for consumers when deciding which lender to choose for various financial products. The below chart shows the latest information as of the fourth quarter of 2021 comparing average credit union interest rates with average bank interest rates for various financial products (based on data from the NCUA).
As you can see, credit unions tend to offer lower interest rates than banks. This is especially the case for auto loans where the difference in rates is as much as 2.2%. Said another way, for used and new car loans, credit unions on average offered financing terms that were 40% cheaper than the average financing a bank offered in the final months of 2021. However, for some products like mortgages, there doesn’t seem to be as much of a difference.
How Much Checking Accounts Cost at Credit Unions vs Banks
Depending on the type of account you have, your bank or credit union may charge you for storing your money with them. This is often the case with checking accounts, which are also known as a transactional accounts because the balances in these accounts move up and down frequently. This is because consumers might have for example, direct deposits from their employers and automated bill payments set up. Because of this volatility, lending out the funds deposited in checking accounts is a riskier proposition for banks and credit unions. This is one of the main reasons why banks often will charge customers for having these accounts unless they meet certain criteria, which often involves maintaining an average daily balance above a certain amount. So the question is: is there a difference between credit unions and banks when its comes to what they charge for checking accounts?
In the above we did some research into two major banks and two major credit unions. The conclusion is that while both banks and credit unions will sometimes charge you for a checking account, banks tend to charge more and tend to have higher minimum balance requirements to avoid the charges. Memphis City Employees is a credit union in Tennessee that has almost 42,000 members as of December 31, 2021. They offer checking accounts with no monthly cost and no minimum balance required. This is something that you’re unlikely to find with a bank. Similarly, Embers Credit Union is a credit union in Michigan that has almost 30,000 members – their checking accounts also have no minimum balance and no monthly charges.
Branch Network Availability
It may come as a surprise to many that the availability of a physical branch was noted as being important of very important by a significant percentage of consumers in our recent survey. Customers care about having a bank or credit union branch that is accessible to them. On this measure, we do see some variation between banks and credit unions. According to data from the FDIC, there are approximately 82,900 insured bank branch offices as of this writing, which is significantly more than the 20,500 credit union branches according to the NCUA. What this data also means is that the average bank will have 17 branches while the average credit union will only have 4 branches. Banks tend to have greater branch accessibility than credit unions.
Online Services Availability
Given that banks are generally larger than credit unions on pretty much every metric, you might think that they would be superior from a technological perspective. However, another finding from our recent survey was that banks and credit unions are more or less equivalent when it comes to the provision of online banking services and the availability of mobile application for viewing account balances and bill payments. On this measure there’s really no difference between banks and credit unions.
Credit Unions vs Banks Deposit Insurance
If you have savings with a federally insured bank, then it is likely that those savings are insured by the FDIC up to a maximum of $250,000. These banks are also regulated by the FDIC. If you have funds deposited with a federal credit union, then your funds are also insured up to $250,000 by the National Credit Union Association. This wasn’t always the case – the deposit insurance limit for credit unions only increased to match the same levels as banks in 1979 after an updating of the Federal Credit Union Act and at that time the limit was $100,000. It wasn’t until 2008 during the financial crisis that the insurance limit was temporarily increased to $250,000 before being made permanent in 2010. In terms of the level of insurance provided for deposits, banks and credit unions are essentially identical.
Minority Depository Institutions
Minority Depository Institutions (MDIs) serve important roles in the United States in promoting economic development in minority and lower income communities across the country. There are banks and credit unions that are minority depository institutions, and specifically as of this writing there are 143 banks that fit this criteria and 509 credit unions. While MDIs exist for both categories, there are much fewer banks that fall into this category than credit unions.
Are Banks Safer Than Credit Unions?
The chart above is based on data from the FDIC and NCUA showing the number of federally insured credit unions and banks that have failed each year over the past decade. Encouragingly, the number of failures has decreased significantly in recent years for both banks and credit unions. But if we look at the last 5 years, there have been 21 bank failures and 28 credit union failures. So based on that one could conclude that banks are statistically safer than credit unions. However, we also need to account for the fact that deposit insurance exists to protect consumers from suffering a loss whenever a bank fails. For example, while there were 7 credit unions that failed in 2021, none of them resulted in depositors actually suffering any loss. This was in large part due to the existence of deposit insurance which is set up to protect consumers. Overall, we think credit unions are just as safe as banks.
Final Word on Credit Unions vs Banks
In conclusion, while there are a lot of similarities between credit unions and banks, the bottom line is that in deciding whether to open an account or secure a loan it’s a great idea to examine all available options which should always include both banks and credit unions.
Above we summarized side by side the major features of banks and credit unions. As should be pretty clear, there are more similarities between the two than differences and ultimately which you choose to go with will depend on what you care about most. If you really value having a large branch network then a bank might be a better match. On the contrary if all that matters to you is getting the cheapest possible financing (i.e. lowest interest rate) then a credit union might be a better fit.