Credit Union or Bank: What’s the Difference?

Whenever you deposit your paycheck or take cash out of an ATM, you’re probably using a bank or credit union.

Technically, there are other ways to store and access cash, but banks and credit unions are the most common places to open checking and savings accounts. 

You can also often borrow money from these financial institutions — such as through mortgages, car loans, and credit cards.

But while banks and credit unions offer similar services, there are some key differences.

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What Is a Credit Union?

In many ways, a credit union is like a bank — it accepts deposits, offers loans, etc. However, a credit union is not-for-profit, while a bank is for-profit. A credit union is also owned by its members (customers) and regulated by the National Credit Union Administration (NCUA).

Credit unions use the term “member” because their purpose is to provide financial services for particular groups, rather than turn a profit. 

For example, a credit union might be open to members in a particular geographic area or who work for specific companies or industries.

Keep in mind, however, that not-for-profit is not the same as nonprofit. Nonprofits have a charitable purpose, but not-for-profits like credit unions do not.

READ MORE: Checking vs. Savings Accounts: What’s the Difference?

Credit Union Pros and Cons

Credit unions can be a great place to manage your finances, since being not-for-profit means perks for you, like reduced fees. But credit unions can also come with certain drawbacks, like not having as much reach as major banks.

While each credit union is different, in general they tend to offer the following pros and cons (but still do your research to compare).

Credit union pros

• Low fees: Credit unions often have lower fees than banks. Because they don’t have shareholders, credit unions return their profits to their members in the form of cheaper services, such as low- or no-fee checking accounts.
  
• Competitive interest rates: By being a not-for-profit, they tend to offer higher interest rates for deposits (like in a high-yield savings account) and lower interest rates for borrowing, such as on personal loans.
  
• Community connections: Credit unions typically have some form of community aspect, such as being affiliated with certain cities, states, universities, employers, etc. “Members often have shared interests and appreciate participating in an institution designed to help other members,” according to the NCUA.

Credit union cons

• Membership restrictions: In general, they have narrower eligibility than banks do. If you don’t live or work in a certain area, for example, you might not have a way to join.
  
• Fewer branches: Credit unions have fewer physical branches than large national banks. Credit unions also might not have as many of their own ATMs — although credit unions often provide access to a nationwide third-party network of fee-free ATMs, so that’s not as big of an issue.
  
• Simpler technology: Some credit unions don’t have very advanced technology and have relatively clunky websites and mobile apps. For-profit banks, especially large ones, can invest in more modern tech.
  

What Is a Bank?

A bank is a for-profit, nationally or state-licensed financial institution that accepts deposits and offers other financial services, such as lending and investing. 

Banks can range from large, national institutions to small community banks.

In the U.S., banks are highly regulated by agencies such as the Federal Reserve for state-chartered banks and the Office of the Comptroller of the Currency for national banks. This regulation can affect things like check clearing times and the amount of capital banks must hold.

READ MORE: Should You Save or Invest Your Money?

Bank Pros and Cons

The specific pros and cons of banks can vary depending on the financial institution — there can be big differences between, say, a large national bank that’s been around for over a century, versus a new online bank. 

That said, consider the following common pros and cons of banks (but again, you’ll likely want to compare specific financial institutions).

Bank pros

• Broad access: Banks often have fewer requirements to join than credit unions do. For example, you can open an account online without having to live in a specific area. Even if you need to visit a branch to open an account, banks are generally less restrictive.
  
• Full services: Some banks offer more comprehensive services than credit unions do. For example, a bank might offer wealth management services or a broader range of credit cards.
  
• New technology: You might find that banks are better able to invest in new technology, such as mobile apps and financial planning tools, since they’re for-profit. That said, the differences depend on which banks and credit unions you’re comparing.

Bank cons

• High fees: While fees vary from bank to bank, you might find that some banks charge higher fees and more fees than some credit unions.
  
• Less competitive rates: Some banks offer lower earning rates on checking or savings accounts, or higher interest rates for loans. That said, many banks offer competitive rates — especially online ones — so it’s good to compare.
  
• Profit focus: You might prefer that your funds go toward providing financial services within your community, rather than toward rewarding shareholders. That’s not to say that banks don’t reinvest in their communities — many do — but they still have a profit focus.

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What Is Better, a Bank or a Credit Union?

Ultimately, choosing a bank or credit union depends on what you’re looking for.

If you want more of a community emphasis and potentially better rates and fees, you might go with a credit union where you can qualify for membership. 

If you want a financial institution that’s easier to join, with more comprehensive financial services and technology, you might go with a bank. 

A lot depends on which bank or credit union you’re considering. Some credit unions, for example, offer better tech than certain banks. Or you may find an online bank that has higher savings account interest rates than a credit union you’re considering.

Take your time comparing what different banks and credit unions offer. 

You also don’t have to choose just one. Some people like to have accounts at multiple institutions, so you could use both a credit union and a bank.

READ MORE: How Many Bank Accounts Should I Have?

FAQs

Are credit unions safer than banks?

Credit unions are not necessarily any safer than banks. Credit unions typically belong to the National Credit Union Administration (NCUA), while banks generally belong to the Federal Deposit Insurance Corporation (FDIC). Both provide up to $250,000 in insurance per account.

Are credit unions nonprofit?

No, credit unions are not nonprofits, but they are not-for-profits owned by their members. The difference is that nonprofits generally have a charitable purpose, while credit unions simply return profits to members in the form of better services, like lower fees.

How do banks make money?

Banks make money through a combination of fees, interest charges, and investments. For example, a bank could make money on a mortgage through an origination fee as well as the interest it collects on the mortgage. 

Banks can also make money by reinvesting a portion of customer deposits in higher-yielding instruments, such as Treasurys.

TL;DR

Banks and credit unions both serve the same purpose: a place for you to deposit your money and access loans or other financial services. 

The difference is in how they’re structured: banks are for-profit while credit unions are not-for-profit. This means that credit unions often have lower fees and higher rates on savings accounts, since they don’t need to answer to shareholders.

On the other hand, banks often have more services, wider reach with branches and ATMs, and better tech.

But these are just generalizations, and it’s better to compare specific institutions as you’re shopping around, rather than just assuming one is better than the other. 

For more banking and money advice, check out these episodes of the Erika Taught Me podcast:

• The Psychology of Money
• Get Past Your Money Mistakes
• How to Become Better With Money

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