Confused about the differences between a Bank and a Credit Union? Don’t be ashamed, from the outside looking in, they can appear to be very similar at first glance. Today we are going to explore some of the differences you should probably be aware of as well as some of the benefits.
The Big Banks
A traditional bank focuses on commercial and retail business. They are authorized to accept deposits, invest your money, pay and receive interest, make loans, provide checks, and provide a variety of other financial services to their customers. These other services might include wealth management, safe deposit boxes, and currency exchange, among other things.
Technologically speaking, banks tend to have the money to invest in the latest and greatest. This is sometimes a great thing, but can also be pricey when you consider the fees necessary to pay for it. You would also be hard-pressed to travel to another state and not see a physical location of one of the leading banks, like Chase, Wells Fargo or Bank of America. This too is expensive for those banks, but can sometimes be a good thing for their customers.
However, (and I am sure you already know) banks are profit-driven organizations. This means a couple of things really. To begin with, it means their profit goals tend to be more important than the financial goals of their customers. It also means that any declared earnings are paid to the stockholders. Stockholders are sometimes referred to as shareholders. The terms stockholder and shareholder mean the same thing in that they refer to the owner of shares in a company. The point being made here is that shareholders are the owners of the bank, and the declared profits by the bank go to the owners. Furthermore, history has shown that they usually want more and more of it too. So where does that leave the customers?
Well, banks tend to fee their customers to death. Between nonsufficient funds fees, overdraft fees, minimum balance fees, maintenance fees, ATM fees, transaction fees, foreign transactions fees, lost debit card fees, paper statement fees, fees for redeeming rewards points, returned mail fees, account closing fees and yes… even human teller fees (among others), it becomes easy to see how some banks can be so profitable.
Their fees can add up fast as the funds are quickly removed from their customer’s bank accounts and transferred to the pockets of their shareholders. However, banks are also notorious for offering low to no interest rates on the accounts that are supposed to pay their customers. At the same time, they will demand a high-interest rate on the loans they provide. It’s not personal; it’s just business.
And for all of this, you are provided the addition of poor customer service. That may sound spiteful but that’s not even my opinion. A 2015 study by Consumer Reports suggested that one of the major downfalls of big banks is that they don’t understand customers’ needs and don’t provide personalized service. Take one look at their business model and you can really begin to see why.
Of course, many people don’t exactly associate the word “bank” with “positive” these days. After all, their reputation came about for a long list of reasons. The good news is that there is an alternative for you and your financial service needs.
The Mighty Credit Union
Similar to a bank, a credit union also focuses on commercial and retail elements and can accept deposits, make loans (such as personal, auto, and mortgage) and provide a wide variety of financial services like wealth management services and safe deposit boxes. Also like a bank, credit unions are federally insured. So you can deposit your money in a credit union with confidence and use the same services banks provide such as checking, debit cards, credit cards and so on. That is about where the similarities end.
Let me make this next point abundantly clear; credit unions are NOT banks. Credit unions are actually not-for-profit financial cooperatives, democratically run by its members with the expressed mission of increasing member benefits rather than shareholder profits. This means that the earnings are paid back to members in the form of higher savings rates, lower loan rates and by providing dividends. Basically, the exact opposite of a bank.
Note that credit unions don’t have “customers”; they have members. There is a difference between a customer and a member. Credit unions are member-owned. Becoming a member is like walking into a bank and becoming a shareholder because YOU become a member as soon as you make your first deposit; only it is better because you will not be exploiting those you serve. Again, the members are the ones who reap the benefits of the profits made.
The profits from any fees or investments are going back to you (the member) by way of better interest rates than what banks can provide. This means you will get lower interest rates on loans and higher returns on deposits. And of course, any fees you do pay will be fewer and cheaper than what the big banks will charge. This is because any fees placed by a credit union are really only there to cover costs; not to create another profit stream. In fact, one of the things credit unions are notorious for is fewer attached strings and fewer fees.
They can do this because credit unions are technically “not for profit”. The point and purpose of a credit union are to serve their members rather than to maximize profits. Any surpluses realized are used to help the members in whatever way they can. This is also why and how many credit unions (especially the larger ones) are able to invest in technology and other competitive services.
However, you may not be able to just walk into a credit union and join. Credit unions have limited eligibility requirements for joining. The good news is that there is probably a credit union out there just for you. Requirements are normally based on industry, geographic location and sometimes even something as simple as common interests.
For instance, some universities offer a credit union for alumni, students, faculty and nearby residents and church-linked credit unions are just what they sound like. There are also military credit unions and industry-specific credit unions such as aircraft manufacturing, education, agricultural and so on. This structure and business model is actually another benefit in and of itself because you are literally doing business with people who are like you. This pretty much defines the “cooperative”. The members of the credit union are providing mutual assistance in working toward a common goal. That goal is, of course, financial stability and security.
Credit unions also win when it comes to customer service. In fact, credit unions are known for their superior customer service. According to the American Customer Service Index, between 2010 and 2015, credit unions consistently ranked higher than banks in this regard. It makes sense when you really think about it. Better products, member-owners and common goals. Why wouldn’t the customer service be better? The credit union thrives when members are utilizing more of the services provided and are happy.
Arguably one of the best things about credit unions is that they are local, and this is a big benefit for both you and your community. Several studies have proven that when you do business with locally-owned businesses (as opposed to nationally-owned mega-corporations), significantly more of your money is used to strengthen the economic base of your community. It is a win/win.
But being local does not mean that you are confined to the area or limited in services if you find yourself on vacation or happen to travel outside of your area. Many credit unions participate in something called “Shared Branching”. A very neat concept; shared branching basically turns other credit unions in the network into your branches outside of your area. This gives members the ability to conduct in-person transactions at thousands of locations around the country. Additionally, many credit unions also participate in something known as “The CO-OP ATM Network” which includes almost 30,000 surcharge-free cash machines.
It almost sounds too good to be true, right? It’s not. It’s also not some new fad set to burn out in the coming years. Credit unions have been around for a while now. In fact, the first credit union in the United States was opened up in 1908. The secret must be getting out because today, there are more than 7,000 credit unions around the nation boasting a collective membership of roughly 100 million Americans.
So let me close by posing two simple questions. Are you a member of a credit union yet? If not, then why not?
Be sure to read my article titled, “How to Avoid Overdraft Protection Fees at the Bank.”
See Financial/Legal/Tax Disclaimer