Credit Unions vs Banks: Understanding What Works for You

From a street view, a credit union looks just like a bank: rows of teller windows, convenient drive-through lanes and attractive lobbies. But hidden within those walls are some key differences that clearly separate credit unions from banks. Yet credit unions still remain a mystery to many American consumers. That seems to be changing. Ever since the financial crisis led to taxpayer-paid multi-billion dollar bailouts of big banks, people have been seeking alternatives, with more and more consumers choosing credit unions. In fact, according to the National Credit Union Administration (NCUA), the federal regulator of the industry, credit unions added 2 million new customers in 2012. Politics aside, let’s consider why a credit union may be the perfect solution for you.

The Big Difference Between Banks and Credit Unions

There are two essential distinctions between a bank and a credit union. First, a credit union is a not-for-profit organization. As big banks bloat to mammoth proportions with record profits based on a “too big to fail” platform, the not-for-profit nature of credit unions may be their most compelling feature of all.

The second major difference between CUs and big banks is that banks are giant corporations controlled by ultra-wealthy board members, while credit unions are member-owned. That’s right, join a credit union and you’re an owner. Now that doesn’t mean you get a big corner office with your own miniature putting green, but it does give you a sense of ownership and pride, for what that’s worth.

If you’re a fan of small businesses, credit unions may also float your boat. According to the Credit Union National Association, a trade association for the industry, each of the nation’s four largest banks are larger than the entire credit union industry as a whole.

What Matters Most: Services and Fees

Let’s drill down to the services you need most and see how credit unions and banks compare:

  • Interest-yielding accounts – Because of their not-for-profit business model, credit unions generally pay a higher interest rate on savings and CDs than banks that have to pad their profit margins.
  • Checking account fees – Credit unions return profits to owner-members, which means account fees can be kept to a minimum. You’re likely to enjoy free checking at a credit union without all of the account restrictions the big banks have. And you know all of those “nuisance” fees banks charge for things like direct deposit, transfers, wires, and balance transfers? You’re just not likely to find them at your local credit union.
  • ATM accessibility and fees – Big national banks have more ATM and branch locations, that’s for sure. That can be an important for convenience and helps avoid fees associated with using another bank’s ATM. But just like banks, credit unions are connected to national ATM networks for easy member access just about anywhere – and many credit unions reimburse the ATM fees you may be charged.
    Customer service – Here’s a big difference. Giant banks may make you navigate through complicated and endless voicemail trees, automated email responses and foreign customer service call centers, but because credit unions are small businesses, it’s often easier to get person-to-person service.
  • Online manageability – For the past several years, big banks have excelled in this category – you can now complete just about any transaction online – but credit unions are catching up.  Large banks have massive IT departments, and in fact, would prefer you do your banking online: it helps them reduce headcount and overhead. Credit unions are a bit more old fashioned and people-centric, so it depends on how you like to do business. Credit Unions should at least have the basics though: account balances, transfer capabilities and online loan payments.
  • Insured deposits – Bank deposits are insured up to $250,000 by the FDIC. All federal and most state-chartered credit unions offer equivalent deposit insurance through the National Credit Union Share Insurance Fund. When it comes to secure deposits, it’s a draw between big banks and credit unions.
  • Loans – This is perhaps the biggest benefit of a credit union membership. They really knock the ball out of the park when it comes to loans. Because of its unique ownership structure, a credit union doesn’t have to abide by loan restrictions and qualifications mandated by some far-away corporate home office. And being a not-for-profit organization means a credit union doesn’t have to charge exorbitant interest rates, either. It’s simple; credit union loans are generally cheaper.

The Benefit of Being an Owner-Member

Let’s say you need a loan and your credit is not quite perfect.  So, imagine walking into your credit union instead of a bank, maybe for a new car loan or a mortgage for your first home. If your credit report has a few blemishes, credit unions can be a bit more flexible to work things out. The loan process isn’t a “check off the box” interview like it would be at the Big First Global Bank; it’s a conversation.

Credit unions like to make loans to members.  According to the NCUA, credit union lending grew by 4.6 percent in 2012 alone. And in a report entitled Commercial Banks and Credit Unions: Facts, Fallacies and Future Trends issued by the Credit Union National Association, credit union loans grew by over 13% from the start of the financial crisis to year-end 2012. “In contrast, bank loan portfolios increased by only 3% during this same five year period,” the report said.

The Simple Dollar “Approved” Credit Unions

Credit unions come in many flavors. With a bit of research, you can likely find your favorite flavor of financial services in a credit union near you, depending on your goals and capabilities. Here is a sampling of stand-out credit unions that have leading rates and services:

Star One Credit Union – Sunnyvale, California
This credit union offers excellent checking services, paying higher than average interest with an opening balance of only $100, and sweetens the deal with a low non-sufficient funds fee ($13), a low monthly service fee ($3) and no ATM surcharges.

University of Southern California – Los Angeles, California
One of the leading educational institution credit unions, the USC credit union caters to students, faculty and alumni with free unlimited checking and premium interest rates on deposits. It even offers financial workshops and an iTunes checking account where members can earn credits for free iTunes downloads. Bonus: All Los Angeles residents can also become members.

Alternatives Federal Credit Union — Ithaca, New York
This credit union is big on member perks, offering free tax preparation services and a seven-week financial education workshop. Are you saving for something big, like buying a home or opening a business?  Alternatives FCU offers “development” accounts that actually match your savings deposits.

Permaculture Credit Union — Santa Fe, New Mexico
Here’s a credit union that is all about the green: as in money and ecology. As of February 2013, the institution has granted $15.2 million in some 685 loans to support sustainable living projects, such as loans for energy-saving cars, and micro-loans to farmers and to educate the public on permaculture, a design principle that promotes self-sustaining ecosystems.

The Bottom Line

If bringing banking back to old-fashioned simplicity, with hometown service and owner/member benefits, sounds good to you, making the switch to a credit union can be fairly painless. You can learn more and search for local credit unions at www.asmarterchoice.org. Credit unions can certainly offer some financial perks at the end of the day, with better interest on savings and fewer fees, but with fewer online services and branch locations, their style of business may not be efficient or convenient enough for everybody. Ultimately, it comes down to how you like to do business.

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