My first bank account was not at a bank. It was at a credit union.
When I was 16, my mother and I walked into a branch of the Teachers Federal Credit Union and opened a joint account. They printed out a little card, laminated it, and gave it to me. I stuck the little bluish-green card in my velcro wallet and felt like I’d aged a bit more.
I didn’t know much about money at the time. I knew I had a bank account and I could, once in a while, log on to a website and see how much I had saved.
When I went to college in Pittsburgh, I opened a student checking account at PNC Bank because they had ATMs on campus and a branch just down the street. The student current account was the perfect product for a poor student. PNC Bank was, to my knowledge, my first commercial bank account.
At the time, I didn’t know the difference. They were both financial institutions. They both had ATMs. For all intents and purposes, they were the same.
It wasn’t until I got older that I learned they weren’t the same. Similar, but not the same.
- The key difference
- Eligibility criteria
- Geographic footprint
- FDIC vs. NCUA Deposit Insurance
- Interest rate
- What is better?
- What about local banks versus credit unions?
The key difference
There really is very little practical difference between a commercial bank and a credit union.
Structurally, and dare I say philosophically, they are very different. A credit union is a financial cooperative, owned by members who have deposits in the bank. A credit union is created for the benefit of its members. All depositors are owners, regardless of balance, and get one vote in board member elections.
A commercial bank is a for-profit institution, often listed on a stock exchange. They are owned by shareholders and seek to generate profits for those shareholders. A depositor is just that, someone who deposits their money in the bank. The bank’s objective is to obtain the highest possible return on these deposits.
There may be a tendency to think of credit unions as ‘good’ and commercial banks as ‘bad’, but this is more nuanced. It is their responsibility. Both are accountable to their shareholders. The difference is who is a shareholder in each institution. A depositor is a shareholder of a credit union. A depositor is not a shareholder of a commercial bank, the people who own shares are the shareholders.
We asked Professor David Kassclinical professor of finance at the Robert H. Smith School of Business at the University of Maryland, for his advice on choosing between the two and he said:my advice for people choosing a bank for a loan, checking account, savings account, etc. would be to visit several banks near their home or office to compare terms (interest rates, etc.) to find the best set of services for them. Likewise, I would make similar comparisons with the credit unions they qualify for. If someone is looking for the highest interest rate on a certificate of deposit (with an expiration date of 6 months, 1 year, etc.), online banks should also be considered. Banks and credit unions insure their deposits up to $250,000.”
Understanding this key difference can shed light on the other differences.
A commercial bank has no eligibility requirements.
A credit union, by law, must have a restriction based on affinity (membership in an organization), geography, or other affiliation. Once you qualify, you are eligible for life even if the affiliation changes.
For example, my first bank account was with Teachers Federal Credit Union in Long Island, New York. Here are its eligibility rules: “Individuals who live, work (or regularly conduct business in), worship, or attend school and businesses and other legal entities located in Nassau County, New York, or the following parts of Suffolk County, New York can join TFCU: Town of Huntington; Town of Babylon; Town of Smithtown; Town of Islip; Town of Brookhaven; Poospatuck Reservation; Town of Riverhead; or Town of Southold”
My mother worked for Three Village Central School District, located in Suffolk County, and I was her child (technically, we opened a joint account when I was underage, so it was still her account too). It was called Teachers Federal Credit Union, but you didn’t have to be an educator or work in the school system.
By comparison, almost anyone can walk into a Bank of America and open an account.
(I say “almost everyone” because to open an account you may need to provide two pieces of ID and a social security number – if you don’t have these, it can be difficult to open a bank account )
Credit unions generally have a much smaller geographic footprint. They can sometimes circumvent this problem by joining ATM networks so that their range is that much greater. Tower Federal Credit Union has only 12 branches in Maryland, but they fill in the gaps with dozens of ATMs. They do not, however, have a presence outside the region. Some credit unions, recognizing their limited geographic reach, will offer ATM discounts/refunds to overcome this limitation.
Not all credit unions have a limited geographic footprint. Navy Federal Credit Union has nearly 300 branches in 199 cities and thirty states. They are part of the ATMs in the CO-OP network (30,000), CashPoints ATMs (1,100), as well as the 2 million ATMs in the Visa?PLUS system. As you can see, they have quite a large geographic footprint for a credit union.
However, they can still be relatively small compared to a commercial bank. Wells Fargo has over six thousand branches. Bank of America has more than five thousand.
Online-only banks that do not have physical branches, like Ally Bank, have partnered with large ATM networks like Allpoint (55,000 ATMs) and they offer ATM fee refunds. Ally Bank will also refund up to $10 at the end of each statement cycle for ATM fees.
FDIC vs. NCUA Deposit Insurance
Both are protected by deposit insurance but by two different organizations.
Credit unions are federally insured up to $250,000 by the National Credit Union Administration (NCUA). Commercial banks are federally insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). The NCUA and FDIC are backed by the full faith and credit of the United States Government.
For all intents and purposes, NCUA and FDIC coverage are the same. They are separate organizations, but they are similarly funded.
Since the credit union is owned by the depositors, they tend to pay higher interest rates on deposits and charge lower interest rates on loans.
Higher interest rates on deposits. This is often true when you compare brick-and-mortar commercial banks with brick-and-mortar credit unions. When you bring online banks into the comparison, high yield savings accounts will have higher rates than both. This also applies to money market accounts.
In early April 2018 I compared the rates of these three categories, I found that physical commercial banks paid the least (often 0.01% APY!), credit unions were in the middle with around 0.50 %APY, and online banks were around 1.50%-1.70% APY. These days it’s a bit lower, but the point is still true.
Credit unions are beating regular banks but still can’t compete with the online banking economy.
Lower interest rates on loans. I compared auto loans at Tower Federal Credit Union (a local UC where I now live in Howard County, Maryland) with Bank of America and found a big difference.
- The interest rate on a 60 month loan for a new car at Tower Federal Credit Union is 2.24%.
- The interest rate on a 60 month loan for a new car at Bank of America is 2.99%.
Your actual rate will differ based on factors such as credit score, but even the blind rate differs by 75 basis points.
As you can see, the institution maximizes the financial benefits for whoever its shareholder is. Credit unions have higher deposit interest rates and lower loan interest rates because they try to maximize financial benefits for depositors. Commercial banks do the opposite because they try to maximize profits for shareholders.
What is better?
Credit unions offer a better financial product than physical commercial banks, but are limited in size and geographic footprint. If you leave the immediate area, your financial life will be slightly heavier and will require a bit of advance planning.
However, online-only banking is hard to argue against. The economy of a bank without physical branches gives it an advantage as its costs are much lower. They have higher interest rates on deposits and lower interest rates on loans because they can afford it. They have no geographic footprint, so they partner with ATM networks to fill the void.
That said, there is a credit union on our list of the best high-yield savings accounts. Alliant Credit Union is a Chicago-based credit union that has a high-interest savings account, an extensive network of ATMs, and a reasonably large affiliate network.
Personally, I don’t have a cashier because I haven’t found it to be better than an online bank.
>> Related: How to find the best checking account
The best option for you will depend on your needs.
What about local banks versus credit unions?
If one of the biggest complaints about big banks is that they are impersonal, would a local bank be better?
May be. Local banks are always commercial banks, so the financial responsibility of the bank is to earn money for its shareholders. Local banks may also be unable to compete financially with national banks due to economies of scale. But one thing they do have is flexibility, and building a relationship with branch managers and loan officers can have limited impact on the decision-making process.
Finally, and this might come in handy on your next quiz night, but taxpayer funds have never been used to bail out a credit union. 🙂