Difference Between Banks & Credit Unions

Both banks and credit unions serve the financial needs of its customers, but there are many differences between the two. Credit unions are owned by members while banks are beholden to stockholders. So, whatever profit that is made by a credit union is returned to its members while that earned by banks goes to its stockholders through dividends. For that reason, a credit union can pay higher interest on deposits and charge less on loans.

Geography

Credit unions throughout the U.S. were granted a federal income tax exemption by Congress because they are a cooperative owned by their membership. However, most banks do pay federal tax on income earned. Those that are established as Sub-chapter S corporations under the IRS Code pass through profits to shareholders who pay federal income tax on them.

Features

Banks can serve the financial needs of anyone wishing to do business with them, but credit unions may only offer membership to a defined class of customer, whether it is defined by profession or geographic area. For example, the First Choice America Federal Credit Union says that "membership is open for those who work, reside, worship, or attend school" in certain counties of West Virginia, Pennsylvania and Ohio. On the other hand, the United Steelworkers of America District 7 Federal Credit Union qualified as non-taxable because it served only the needs of local steelworkers and their families. Then there is the State Employees Credit Union in Maryland that is available to virtually anyone residing in the state.

Size

Notwithstanding the unique advantages inuring to the benefit of credit union members, total assets of credit unions are less than $650 billion while those of banks are over $9 trillion. The largest credit union in the U.S. is Navy Federal Credit Union with over $25 billion in assets and membership in excess of 2.5 million. As of 2005, the last year figures are available, credit unions served the needs of about 87 million people, most of which were of modest means.

Considerations

The minimum a new customer of a credit union may deposit is about $5 where banks ordinarily require opening deposits of $50 our $100. On average, a depositor at a credit union will receive a higher rate on deposits than he might at a bank and pay more to borrow money at a bank versus a credit union.

Theories/Speculation

Banks believe strongly that credit union, because of their non-taxable status, are taking unfair advantage of them. According to the Credit Union National Association (CUNA), if that were true, you would have seen more banks converting to a credit union charter. In the association's opinion, banks are reluctant to do so because they would then be forced to succumb to more democratic control and which would restrict banks ability to develop new products.

Resources

• More about credit unions and banks