Which came first, the chicken or the egg? If the professor on “Gilligan’s Island” can make a radio out of coconut, why can’t he fix a hole in a boat? Why does Nickelback suck so badly? Ahh, the timeless questions of life. Unfortunately, this is a finance column so I have to steer clear of those. Instead I will tackle a question I have been getting recently: What is the difference between banks and credit unions?
Ostensibly, the two are very similar. Both provide secure places to put your money as well as a number of financial services. Accordingly, many people do not really know how to pick between a bank and a credit union, or assume it does not really matter. However, there are actually a number of key differences between the two.
While both offer similar services, the benefits can vary significantly. The underlying difference between the two is that banks are for-profit institutions (although a number of their recent financial decisions might lead you to think otherwise), while credit unions are not. This has a number of important ramifications.
Banks are big. A good number of them are national, and they are in the business of making money. With banks you are going to see a number of fees and worse interest rates on both loans and deposits. If you open an account with a bank, you are a customer, not a member. Big banks’ incentives often directly contrast with their customers’.
Credit unions are small. They are designed to serve a specific group of people such as a neighborhood. When you join a credit union, you are a member, not a customer. As a member, you have a voice when it comes to making decisions and how the credit union is run. This is especially important because credit unions are non-profit organizations. This is aided by the fact that credit unions are tax-exempt while banks are not.
With credit unions, you are more likely to get a loan, and are definitely going to get better interest rates. A credit union can offer anywhere from a 10 percent to 300 percent better rate than a big bank. Although historically credit unions have offered fewer services than banks, this has begun to change. Recently, some credit unions are beginning to expand their services to include credit cards, checking accounts, student loans, mortgages and more.
A big benefit to banks is their size. With big banks, you are more likely to find a branch or an ATM in random locations. Additionally, if you have a problem, most banks are going to have 24/7 customer service, while credit unions probably will not. Banks are also much more likely to have useful online banking tools. And while banks are insured by the Federal Deposit Insurance Corporation (FDIC), credit unions are insured by the National Credit Union Administration (NCUA). However, both are backed by the United States government.
The small size of credit unions can also be a good thing. With a small group of similar people, credit unions are able to tailor their services to their members. Since they are non-profit, they do not need to make profit-driven decisions, and can instead do what is in the best interest of their members. Although their customer service will not be as robust, it will definitely be more personal.
Personalization is one big factor in choosing credit unions over banks. Many people feel that with banks they are just another account number, while in a credit union they are part of a family. With banks, you always have to make sure you are aware of changing rules and hidden fees to avoid penalties. With a more friendly not-profit-oriented credit union, this is unlikely to happen.
Although banks and credit unions offer similar services, the ways in which they offer them are significant. If you are looking for a place to store your money or get a loan, you should definitely consider credit unions and not just banks. As an old fashioned believer in doing business the right way, I think credit unions are the way to go. What’s best for you will largely depend on your financial situation and what you want to get out of your financial institution.
If you have any questions about banks and credit unions or answers to why Nickelback sucks so badly, let DANNY BRAWER know at dabrawer@ucdavis.edu.
