Are you looking to open a new credit card account, get a loan, or start saving? If so, choosing the right financial institution is an important decision you will have to make. Let’s look at the differences between a bank or a credit union, so you can decide which is best suited for you.
What is a credit union?
A credit union is a financial institution that is somewhat similar to a traditional bank. However, it is owned and controlled by its members. And members get a share of the profits based on the number of shares owned by each member.
What is the purpose of a credit union?
A credit union’s main goal is to serve its members. To do so, credit unions provide its members with lower loan rates in comparison to other financial institutions, such as banks. Because credit unions are non-profit cooperatives, their members earn higher dividends on their savings.
Are my savings insured in a credit union?
As at a bank, your savings in a credit union are insured from the minute you make an investment. But there are slight differences. Just as there are FDIC insured banks, there are federally-insured credit unions.
The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by Congress to maintain stability and public confidence in the nation’s financial system. In sum, they protect you from the loss of funds if a bank fails.
Another protection available to credit unions is the National Credit Union Insurance Fund (NCUSIF). This insurance is backed by the U.S. Treasury. And your funds are guaranteed if the credit union fails. That said, federally-insured credit unions provide the same financial security as banks that are FDIC insured.
Lastly, some credit unions are privately insured. While they are safe, they do not have the same government backing as FDIC or NCUSIF insured banks. Before joining a credit union, it’s good to ask questions to determine what type of insurance is provided.
PROS of a Credit Union
• Loan accessibility is easier than with banks, as credit unions opt to working with you if you don’t have good credit or have a low credit score. You can learn about what your credit score numbers mean in our blog, What is a Perfect Credit Score?
• Members have lower credit card and loan interest rates. The interest rate is, simply, the additional percentage charged to borrow money from a bank or credit union.
• Higher saving dividends. When companies distribute some of its earnings back to its shareholders, this is usually done through dividends.
• Credit unions tend to always put their clients first.
CONS of a Credit Union
• Membership is limited to specific groups, organizations and/or geographic locations. You must be a member to access the benefits of a credit union and not everyone may be able to become a member.
• It is much more difficult to find an ATM or branch, as credit unions are smaller than banks. Generally, this means they will not be at many locations. And you can incur fees for using an ATM that does not belong to your credit union.
• Credit unions don’t always stay up-to-date with the latest technology. This can make it a bit inconvenient for members when using their online services.
• You may not be offered as many options when it comes to credit cards and types of accounts.
What is a Bank?
A bank is a financial institution that is certified to give loans and receive deposits. There can be different types of banks such as central banks, money mutual banks, investment banks, corporate banks, and retail banks.
What is the purpose of a bank?
Considering the benefits of a bank or credit union, there are some notable differences. The main purpose of all banks is to make a profit. Banks make a profit by charging interest on credit cards and loans. Banks make their profit by using the deposits of some of their customers to loan to other customers.
A small part of the interest gained from those loans are distributed, quarterly, to customers. The banks, then, make a profit on the balance of funds after paying its customers. Besides profit, there are other purposes to banks as well.
Banks serve as a place to start a savings account. The type of savings account you set up and the amount of money you put in the account determines how much interest the bank will pay you. Banks also provide their customers with mortgage options. The type of banking you require will determine the type of account or investment you make.
Types of banks and their benefits
Central banks are financial institutions that play a critical role in the stabilization of a country’s finances and economy. They are in charge of monetary policies and the printing/issuing of money. Central banks are the last resort bail-out options for commercial banks that need a loan to stay afloat. Central banks do not provide direct services to the average citizen.
A money mutual bank is similar to a credit union. It is a financial institution owned by its members, which is intended to provide a place for them to save. However, money mutual banks encourage its members to invest their savings in loans, bonds, stocks and other financial ventures.
Because the members own the institution, they share in any profits or losses that result from these financial ventures. Without proper research, putting your investment in a money mutual bank can be risky.
Investment banks are financial institutions that act as intermediaries for corporations, individuals or governments. Unlike commercial banks, investment banks do not take deposits. They sometimes serve as the “middle man” between transactions such as wire transfers between two countries that have no bank ties.
Corporate banks are banks that offer their services only to businesses. These banks offer a range of services to their clients such as, cash, credit and asset management, as well as loans to corporations/businesses. Just like investment banks, corporate banks underwrite to large corporations, financial institutions and small to medium size enterprises.
Retail banks are the banks that cater to the general public. They are used for everyday basic banking. Customers can visit a retail bank for various purposes, whether they desire to start a savings account, checking account, get a loan, take out a mortgage or get a certificate of deposit. In addition, retail banking, otherwise known as consumer banking, offers credit and debit services.
PROS of a bank
• You have easy access to ATM’s at multiple locations.
• Branches of most banks are easily accessible and convenient for in-bank transaction.
• Technology is usually up to date and cutting edge, making online transactions a breeze.
• Banks have a wide range of options and services.
CONS of a bank
• Low interest rates on saving accounts. According to Bankrate.com, the average interest rate for savings accounts is 0.07 percent for the week of March 31, 2021.
• Various bank fees for a broad range of items–even for account inactivity or below minimum amounts.
• Higher interest rates on loans and credit cards. You will pay back more to the bank on your credit cards or loans due to their higher rates.
• Your credit history/credit score can hinder you from getting a loan. In our previous blog, you can learn about the different types of credit and how they affect your financial health.
Determining what type of customer you are can help you understand what type of banking suits you best. Unless you own a business or are a head of a corporation, retail banking, otherwise known as consumer banking, is the best type of bank for you.
Although banks and credit unions offer similar services, there are many differences between the two. The choice between which is right for you lies solely in your hand. When choosing between a bank or a credit union, it is always best to gather as much information you can about where you intend to rest your financial trust.
Credit unions may not be right for everyone, and neither may be banks. It is always important to take note that a credit union may not have all the options that you are looking for. In contrast, a bank’s interest rates and fees may not be pleasing to you. These factors must all be considered.
Both financial institutions have their negatives and positives. And what may be right for one may not be right for all. Before making any financial decisions, be sure to do your research to ascertain if a bank or credit union best suits your needs.
If this information was helpful, please share it with others, and follow/subscribe to our blog for more insights to support your financial success.