Two of the biggest places people choose to put their greenbacks are banks and credit unions, but how do you know which option is right for you? While banks and credit unions offer many of the same services, there are some distinct differences in how they conduct their business.
Who’s the Boss?
One of the biggest differences between banks and credit unions lies in ownership. Banks are owned largely by shareholders who have invested in the bank. Credit unions, in contrast, are financial cooperatives that are owned by their members. Once you join a credit union, you’re a part-owner.
Because of the stark differences in ownership, the goals of credit unions and banks differ. Banks aim to satisfy their shareholders by producing a profit through their business. Their profits are made through interest rates, loans and fees. Credit unions, on the other hand, are nonprofit cooperatives.
Pros and Cons of Credit Unions
One of the biggest pros of belonging to a credit union is that the would-be profits that they accumulate are redistributed to the members of the union, usually in the form of benefits, such as favorable interest rates and a lack of minimum-balance requirements.
In addition, since the members are a collective ownership group themselves, they are able to have a say in the decision-making and operation of the credit union. Many times, a credit union’s board of directors is composed of fellow members of the union who have actually volunteered to serve as board members. Credit union members often have a connection to one another, whether it’s a place of employment or a regional association. Many credit unions are therefore also active in their communities.
While credit unions have many desirable traits, they also have their drawbacks. One of the biggest downsides to credit unions is that they can be tough to gain access to. Credit unions tend to be more rigid with their approval process than banks. Also, credit union members who have credit cards may be disappointed with the lack of rewards for those who make consistent payments.
Pros and Cons of Banks
One of the biggest reasons that people choose banks over credit unions is convenience. Bigger banks such as Chase, Comerica and Bank of America have branches and ATMs all around the country. This may come into play if you’re looking to avoid frequent ATM fees. In addition, members of banks have traditionally been able to enjoy more options with their banking experience than members of credit unions. Banking online and transferring funds via an iPhone or Android have now become central parts of the banking experience. Many credit unions haven’t yet embraced such on-the-go technology.
The large number of fees that go along with banking remains one of the largest downsides. Some of the many fees that banks often charge include minimum-balance fees, returned deposit fees and foreign transaction fees. These could add up quickly and can often catch customers by surprise. Another drawback of going with a traditional bank is that customers may be subject to lower interest rates on savings accounts and higher loan and credit card rates. Banks need to make money at the end of the day, so the APRs may be higher when you’re doing business with them. This is why, when making a big purchase such as a car, it’s often beneficial to get a loan through a credit union.
Banks and credit unions are both good options, and whichever one you select will probably depend on which pros and cons are the most relevant to your situation.
We’d like to hear your thoughts. Which route is better? Share your opinions in the comment section below and then check out our tips for choosing the right bank.
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