How Do Credit Unions Differ From Banks?

Credit unions have the nest eggs of over 90 million members.

Credit unions and banks both are financial depositary institutions, and both are insured against insolvency by the federal government. But there are substantial differences in who the institutions work for and how these entities operate. Those differences can affect the interest you earn on your savings and how much interest you pay on your loans.

Bank Ownership

Ownership is one huge difference between banks and credit unions. Banks are profit-making enterprises owned by their investors -- people and institutions that buy a bank's stock and bonds. Investors provide the capital to fund bank operations. In turn, the bank works to make a profit that is paid to those investors. Banks may be huge national institutions with branches in most of the states, or they may be small regional or local institutions operating in one or a handful of states. Banks are run by a board of directors. Anyone can be a bank customer, but bank customers have no voting voice or other decision-making power within the institution.

Credit Union Owners

Credit unions, by contrast, are nonprofit cooperatives owned by their members, and exist to serve the members' financial needs. You must be a member to use credit union services. Any profits from operations are returned to the members in the form of lower interest rates on their loans and higher earnings on their deposits. Credit unions are local membership enterprises designed to serve a specific group or neighborhood. They are democratically controlled by their members, who vote on policies and select the board of directors that will make operational decisions and uphold the credit union's policies.

Rate Differences

Banks and credit unions offer similar financial services. They both make mortgage and consumer loans, issue credit cards, offer savings and checking accounts and offer individual retirement accounts. But credit unions offer credit for substantially less than banks. For instance, says the MSN Money website, credit unions offer consumer loans for up to one to two percentage points below bank rates. Credit unions also offer higher earnings on your deposits, up to one percentage point higher than banks on long-term deposits. Credit unions also have fewer and lower fees than banks.

Availability

Banks have an advantage over credit unions in availability. Most banks have multiple branches across a state, region or the nation. If you have an account with a nationwide bank, you can access your account at any of its branches in the country. This can be important if you are traveling. Most credit unions are local and may have only a couple of branch locations in the home city. But with banks and credit unions both going into Internet banking, banks may be losing some of their availability advantage. Further, a 1998 federal law ended the old rule that credit unions could only serve members sharing a common bond. The change gave almost everyone the opportunity to join a credit union.

References

• MSNmoney.com: Ditch Your Bank for a Credit Union