Banks and credit unions have a fair amount in common. Both provide comparatively safe places to hold cash for spending and saving. Both make loans and extend lines of credit. Both provide basic financial services, like cutting bank checks.
Yet these two types of financial institutions are anything but interchangeable. Credit unions aren’t better than traditional banks, nor vice versa. But each has strengths and weaknesses that would-be users need to understand before opening that first deposit account or applying for a loan.
The seeds of this understanding lie in the details of the products, services, and guarantees banks and credit unions offer their members. Fortunately, those details aren’t too difficult to parse. Consider this your guide to doing just that.
Key Features of Banks and Credit Unions
It bears repeating that banks and credit unions have a lot in common, but key differences do emerge upon closer inspection. Credit unions tend to restrict membership in ways that banks don’t, for example, while generally offering higher interest rates on savings deposits and lower interest rates on loans.
Membership Requirements and Account Availability
As you decide between a credit union and a traditional bank, the institutions’ respective membership requirements — or lack thereof — will be among the first points of distinction you notice.
Membership Requirements and Account Availability at Banks
Banks tend to be more open to new customers than credit unions. To the extent that banks restrict membership or account availability at all, it’s on the basis of geography — that is, community banks or regional banks may not accept applications from would-be customers in states where they don’t have a physical presence. (Online banks like GO2Bank usually don’t restrict applications by geography.)
Otherwise, individuals and couples with Social Security numbers or taxpayer identification numbers and U.S. addresses can generally apply for deposit accounts without restriction.
Membership Requirements and Account Availability at Credit Unions
Credit union customers are known as “members,” which hints at the potential restrictions around opening accounts with this type of institution.
Historically, credit unions restricted membership in fairly drastic ways. For example, some were open only to employees of particular companies or members of particular labor unions, while others accepted members only from very narrow geographical areas.
While some smaller credit unions continue to restrict membership, many larger ones now have gaping loopholes in their membership criteria that allow basically anyone to join. For example, Andrews Federal Credit Union, which has about 120,000 members and a branch network serving the mid-Atlantic states, only asks that prospective members join the American Consumer Council and pay the organization’s nominal membership fee.
If you live in an area served by multiple credit unions, membership requirements aren’t likely to pose a serious hurdle to joining one that fits your needs. In more sparsely populated areas with limited local credit union coverage, you may need to join an out-of-state institution and potentially pay a nominal fee to secure your spot.
Branch and ATM Access
Most credit unions and many banks have physical branches where customers can make deposits, get cash, speak with loan officers, and conduct other financial business in person. Virtually all credit unions and banks also have their own branded ATMs or belong to low-fee or free ATM networks.
Banks’ Branch and ATM Networks
Banks’ branch networks come in all shapes and sizes. National and multinational giants like Bank of America and JPMorgan Chase have thousands of locations littered about the country, while single-branch community banks might serve a single small town or handful of rural communities. That said, more traditional banks have regional, superregional, or national branch networks than credit unions.
Most banks also belong to national ATM networks that include thousands or tens of thousands of in-network ATMs that charge few if any fees for cash withdrawals and other basic financial transactions. These networks may be entirely in-house — for example, Chase Bank has thousands of branded ATMs scattered about the United States — or shared by many different banks, like the Allpoint or MoneyPass networks. Most branchless banks (online banks) belong to one of the major fee-free ATM networks.
Credit Unions’ Branch and ATM Networks
Even larger credit unions that accept members nationwide tend to have smaller physical footprints, either in contiguous geographies (Andrews Federal Credit Union’s branches extend from the D.C. area in the south to New Jersey in the north) or clustered in areas where lots of members live and work.
However, hundreds of U.S. credit unions participate in the Co-Op Financial Services shared branch network, which has more than 5,000 branches across the United States. Co-Op Financial Services credit unions offer reciprocity to members of other participating credit unions, allowing them to deposit and withdraw funds and perform other basic banking tasks while traveling or otherwise far removed from their own credit union’s home territory. And the Co-Op Financial Services has about 30,000 fee-free ATMs in its network, just a bit fewer than Allpoint and MoneyPass.
Financial Products and Services Available
All banks and credit unions offer one or more types of deposit accounts, most often checking accounts (spending accounts) and savings accounts. Many banks and virtually all credit unions also offer credit products, including home loans (mortgages), auto loans (car loans), credit cards, and personal loans.
Financial Products and Services Available at Banks
Every bank, from the leanest mobile bank to the biggest multinational, offers some sort of deposit account. Some stop there, while others offer less common types of deposit accounts (such as money markets) and investment (brokerage) accounts, along with credit products ranging from credit cards and personal loans to secured loans like mortgage and auto loans. Most traditional banks do make loans, historically a key revenue stream for financial companies; some online banks don’t issue loans directly.
The biggest financial institutions typically have the widest breadth of financial products and services, often complemented by private banking or wealth management services designed to craft bespoke financial solutions for wealthier clients. If you want to do all your banking, investing, and financial planning in a single location, you might naturally be drawn to a traditional bank built to do just that.
Financial Products and Services Available at Credit Unions
All credit unions offer savings accounts. These are usually known as “share” accounts because a portion of their balance — usually $5 or $10 — represents the member’s ownership stake in the institution.
Virtually all credit unions also offer checking accounts. And, as the “credit” in “credit union” suggests, virtually all issue mortgages, auto loans, business loans, and other common types of credit products.
Credit unions generally can’t match big banks’ breadth of financial products and services, however. Although some credit unions offer in-house financial planning and wealth management services, they rarely operate their own brokerages — a disadvantage for self-directed investors — and may not offer access to alternative asset classes like forex or cryptocurrency. And credit unions’ credit options might be of the one-size-fits-all variety, with just one or two credit card options available at small and midsize unions, compared with dozens of choices from national issuers like American Express and Chase.
Interest Rates, Account Yields, and Account Fees
It’s worth drilling down a bit more on what bank and credit union customers can expect to pay or receive, respectively, on credit and deposit balances. Credit costs and account yields vary subtly but noticeably by institution type, although it’s also true that prevailing benchmark rates and applicant creditworthiness are far more important determinants of borrowing costs.
Bank Interest Rates, Account Yields, and Account Fees
Banks are for-profit institutions that answer first to their shareholders, not their customers. Unfortunately, this often manifests in higher interest rates on loans, relative both to credit unions and direct lenders, and higher account fees than credit unions. It’s not impossible to find free checking accounts at big banks, but customers often have to jump through hoops like minimum balance, monthly direct deposit, or transaction requirements or hold substantial assets across multiple accounts to avoid monthly service fees.
Likewise, traditional banks often pay lower interest rates on savings accounts than credit unions. Big-bank savings accounts have particularly low yields that make them more-or-less useless in the eternal fight against inflation.
Credit Union Interest Rates, Account Yields, and Account Fees
As nonprofit, member-owned institutions, credit unions aren’t as focused on the bottom line as for-profit banks. This enables them to charge lower rates on credit products and levy fewer (and lower) account fees relative to banks.
Credit unions may also pay higher interest rates (yields) on deposit account balances, although many online banks outcompete brick-and-mortar credit unions on this point. More sophisticated credit unions that market digital money management services on a national basis, like Signature Federal Credit Union, generally offer yields on par with or better than online banks.
Financial Technology
At this point, virtually all banks and credit unions operate secure websites that offer basic online money management services (online banking) and enable remote customer-staff interactions. But customers should be aware that the sophistication and scope of these capabilities can vary significantly by institution type — and by size, with many smaller banks having more in common with small and midsize credit unions on the technology front.
Financial Technology Available at Banks
Online banks and larger traditional banks have the resources and technical ability to design sophisticated online banking portals and mobile banking apps that can replicate most if not all of the in-branch banking experience and offer convenient services like early payday, instant person-to-person transfers, digital bill paying, and built-in savings buckets. To be sure, larger credit unions are increasingly attentive to the tech demands of younger digital natives and can compete with bigger or online-only banks at this game, but most smaller and midsize credit unions can’t.
Financial Technology Available at Credit Unions
Many credit unions still don’t have mobile banking apps and offer only rudimentary digital banking platforms that leave out capabilities most consumers take for granted, like peer-to-peer transfers. If you expect to be able to do most of your day-to-day banking digitally, you should investigate the tech capabilities of any credit union you’re thinking about joining and steer clear of institutions that don’t seem up to snuff. A general rule of thumb: If the credit union’s website feels dated and doesn’t work well on a mobile device, it probably won’t offer a quality digital banking experience.
Deposit Insurance
Rest assured: Whether you keep your money with a bank or credit union, it’s insured against institutional failure up to legally mandated limits. Some banks, especially, are even more generous with deposit insurance than legally required.
Deposit Insurance Available at Banks
All reputable U.S.-based banks carry deposit insurance through the Federal Deposit Insurance Corporation (FDIC), which insures deposits up to $250,000 per account type, per institution. Some financial institutions, especially those that offer cash management accounts, go even further. Deposit insurance limits of $1 million or more are increasingly common on this type of account.
Deposit Insurance Available at Credit Unions
The National Credit Union Administration (NCUA) provides an identical level of deposit insurance on member balances at participating (“member NCUA”) institutions: $250,000 per account type, per institution. Higher limits aren’t as common, but the $250,000 threshold is more than enough for most account holders.
The Verdict: Should You Choose a Bank or Credit Union?
It’s clear that banks and credit unions are distinct in important ways. It’s equally certain that neither is better or worse than the other — just that each is different. Your choice will depend on your personal finance needs, preferences, and priorities.
You Should Choose a Bank If…
A bank could be a better fit for your financial needs if you value any of the following.
- Doing All Your Banking and Borrowing in One Place. Many credit unions offer a solid mix of basic financial products and services: checking accounts, savings accounts, CDs, mortgages, auto loans, personal loans, SBA loans. But few if any can match the breadth and depth of products and services available from major consumer banks. If you want to be able to do all of your banking, borrowing, self-directed investing, and financial planning in one place, you’re better off in the banking world.
- Excellent Online and Mobile Functionality. As a group, banks offer a better online and mobile banking experience than credit unions. There’s a great deal of variation within the banking sector, of course, with traditional, branch-based community banks noticeably behind online-only and nationwide banks on the tech front. But many credit unions are even further behind, to the point that they’re simply not useful for people who prefer not to bank in-branch.
- Few Eligibility Requirements to Open an Account. With notable exceptions like age-restricted senior checking accounts, banks generally don’t restrict account availability or membership except by geography — and people who do business with online banks don’t have to worry about that. By contrast, all credit unions impose some sort of restriction on membership, although it’s often possible for the general public to join by making nominal donations to affiliated organizations.
You Should Join a Credit Union If…
Consider joining a credit union if you see your financial priorities represented here.
- Personalized Service and Responsive Staff. If there’s an upside to being behind the times technologically, it’s that most credit unions still invest heavily in branch-based service and local support staff. If you value the opportunity to meet with a banker or get one on the phone basically on demand, a credit union is likely to be a better fit than a bigger, more impersonal bank.
- Lower Loan Rates (On Average). A nonprofit, customer-centric business model allows credit unions to undercut for-profit banks with lower interest rates on loans and other credit products, including credit cards. Not all credit unions actually do charge lower rates; you should always shop around for the best rates rather than assuming your credit union is the best you can do. But the average credit union user does see real financial benefit from membership — a 2018 analysis by the Credit Union National Association found that the average New York State credit union member reaped benefits worth $85 per person or $178 per household, per year.
- Simpler Account Terms With Less Nickel-and-Diming. Although plenty of banks distinguish themselves with simple, reasonable fee structures, credit unions make a business model out of it. As a credit union member, you’re unlikely to pay a monthly maintenance fee on a checking or savings account, and you’ll probably pay lower fees for things like overdrafts and returned checks too.
- A Member-Owner Model. The typical credit union member doesn’t see any obvious benefit from being a member-owner — it’s not like credit union shareholders get eye-popping dividend checks every year, as big shareholders in corporate banks do. But, on top of the lower rates and fees the model allows, it can feel good to be part of a like-minded credit union community.
Both Are Great If…
Both banks and credit unions are excellent options if:
- You Want a Safe Place to Hold Money for Spending and Saving. Both banks and credit unions carry ample deposit insurance — at least up to $250,000 per account type, per institution, and more at some banks. If your bank or credit union fails, you won’t have to worry about losing insured deposits.
- You Want Access to Lots of ATMs. As long as your credit union is a member of the Co-Op Financial Services network, you’ll have access to tens of thousands of ATMs across the United States — just as you would as a customer of a bank in the Allpoint or MoneyPass ATM networks.
Final Word
Since the turn of the 21st century, the widespread adoption of online and mobile banking has fueled pronounced shifts in the broader public’s financial behaviors and expectations, upending consumer finance. Parallel changes have come about thanks to regulatory reforms and consumer protection legislation implemented in the wake of the global financial crisis of the late 2000s, such as the creation of the Consumer Financial Protection Bureau.
One of the more noticeable consequences of technological and regulatory change has been a convergence — if not a total melding — of banks’ and credit unions’ respective business models. In terms of technological sophistication and product scope, larger credit unions now resemble midsize banks. Meanwhile, smaller, leaner, higher-tech banks and fintech platforms seek to replicate credit unions’ customer experience and stand apart from big, impersonal banks.
This is all to the benefit consumers, who have more choice than ever — and more reason than ever to expect financial institutions to treat them with the respect they deserve. Whether you ultimately decide to use a bank or credit union for your day-to-day and long-term financial needs, you can surely agree that’s good news.
