When it comes to choosing a financial institution, you have two main options: open an account with a traditional bank or become a member of a local credit union. Both will help you manage your money and build your savings, but they do so in different ways, and those differences can dramatically impact your banking experience. Here’s what you need to know about these two types of financial institutions and how to tell which is best for your needs.
How Banks and Credit Unions Differ
Banks and credit unions have many similarities. They both offer checking and savings accounts. They both issue loans and other financial products. They both can help you manage your money. But they also have some key differences that you need to be aware of before you open an account.
Who Can Open an Account
Banks are not selective about who can open an account. If you have the money to make an initial deposit, a valid government ID, and a Social Security number, you can open an account and become a customer. Credit unions, on the other hand, are more selective. People must meet specific membership requirements to open an account.
The requirements will vary from credit union to credit union. Some require you to live or work in a specific community. Others may require that you be an employee of a specific industry. Before you try to open an account, make sure you’re eligible for membership.
The Interest Rates They Offer
Believe it or not, credit unions are often able to offer higher interest rates on savings accounts and lower rates on loans than traditional banks. That’s because credit unions are considered not-for-profit organizations. They’re answerable to their members, not shareholders. Since they’re not in business to make massive profits, they can offer better rates to their members.
Banks are for-profit organizations and actively look for ways to increase the money they bring in each month. The less interest they pay on savings accounts and the more interest they can get from borrowers on the loans they issue, the bigger their profits will be. Those higher profits benefit shareholders and investors, not the bank’s customers.
Who They’re Insured By
Most banks and credit unions insure the money you keep in your accounts up to $250,000, but different organizations insure them. Banks work with the Federal Deposit Insurance Corporation (FDIC), while credit unions work with the National Credit Union Administration (NCUA).
The FDIC and NCUA insurance guarantees you’ll have access to your money if the bank or credit union experiences extreme financial hardship or fails altogether.
The Fees They Charge
Banks are motivated by profits. This motivation often leads them to charge fees on different accounts. The fees they charge will vary from bank to bank but may include the following:
- Overdraft fees
- Excessive transaction fees
- Account maintenance fees
- Fees for dropping below an account’s minimum required balance
Credit unions do what they can to avoid charging their members fees. Some may still charge overdraft fees, but many are waiving them to serve their members better. Keep in mind that some credit unions may still charge maintenance fees on certain types of accounts. Always ask your credit union about their possible fees before you open an account.
The Pros and Cons of Using a Bank
Opening an account at a bank can be a great option, but it’s not the perfect choice for everyone. Here are a few pros and cons you can expect if you open an account at a bank.
- Banks typically have more locations and may have branches all over the state for your convenience.
- Banks often have more advanced technology and more advanced online and mobile banking tools.
- Banks tend to charge higher fees.
- Banks often offer lower interest rates on savings accounts and charge higher interest rates on loans.
The Pros and Cons of Using a Credit Union
Credit unions offer many of the same services as large banks. But before you open an account, you need to understand the pros and cons of working with a credit union.
- Credit unions offer higher interest rates on savings accounts compared to traditional banks.
- Credit unions charge lower interest rates on loans compared to traditional banks.
- These financial institutions serve their communities rather than shareholders and offer products and services geared toward helping their members achieve financial wellness.
- Credit unions offer more personalized service.
- Since they’re community-based, credit unions typically have fewer branches than larger banks.
- Not everyone will be eligible for membership.
How to Choose Between a Bank and a Credit Union
Opening an account at either a bank or a credit union will help you better manage your money. But if you want to get the most out of your banking experience, you’ll want to make sure you’re choosing the right financial institution for your needs. As you weigh your options, think about your banking habits.
If you’re the type of person who travels frequently or needs to be able to access their money on the go, choosing a traditional bank might be a good option. Banks have more locations, and if you open an account with a national bank, you’ll find branches in most states. But a credit union could be a better fit if you’re looking for a personalized touch and don’t need access to branches while traveling.
Credit Unions Can Be a Great Choice
If you’re looking for a place to keep your money that will support you as you grow and one that can provide high-quality customer service whenever you visit, consider opening an account with a credit union. These financial institutions are active members of the community and will do what they can to help you and your loved ones achieve financial wellness. Once you open an account, you’ll be able to experience the credit union difference firsthand.