What's the difference between a credit union and a bank?

Credit unions and banks work basically the same way. Both accept deposits and use those funds to make loans. Both are perfectly good places to keep your money. Just as member banks are insured by the Federal Deposit Insurance Corporation, member credit unions are insured by the National Credit Union Administration, both up to $250,000 per depositor. But what sets a credit union apart from a bank?

What is a credit union?

First, unlike banks, credit unions are financial membership organizations. You don't open an account at a credit union, you become a member and use your deposits to buy shares in the business.

Second, unlike banks, credit unions are non-profit organizations. Their profits are distributed right back to their members. Because of this, credit unions often charge lower fees than banks and pay higher interest rates on savings accounts, money market accounts, interest checking accounts and certificates of deposit.

Credit unions tend to offer the best rates on credit cards, too. If you are looking for a home loan, the mortgage rates at a credit union are pretty similar to other lenders, but you are likely to pay lower closing costs and have an easier time qualifying for a loan.

Can anyone belong to a credit union?

Membership in a credit union used to be very restrictive and only available to people who worked for particular employers. Today it can be much easier to find a credit union to join. Most credit unions are still affiliated with an employer, but others are tied to a community, a county or even a state. Sometimes trade associations or schools have credit unions.

Some credit unions have virtually no membership requirements other than a quick online application. For example, the Melrose Credit Union has an open charter in New York state and has members from all over the U.S. and the world. You can search through the NCUA site to find a credit union to join.

What are the drawbacks to credit unions?

Credit unions generally have fewer branches and offer fewer services than banks. Only about 60 percent of credit unions offer ATM cards. The credit unions that do offer ATMs often operate them through a large network and may charge an ATM fee although it is usually lower than a bank. Another option is to find a credit union that is part of a credit union service center that shares branches.

Some credit unions offer more free online banking services than others. If you are switching to a credit union and you regularly use your bank's online services to pay your bills or transfer funds, check out the credit union's fees first. You don't want to start paying fees for something that you currently use for free.

If you plan to move your money to a bank, make sure you aren't missing out on a particular perk offered by the credit union based on where you live or work.

Which is better?

It all depends on your priorities, what's available in your area, and how important it is to you to bank locally. Whether you are looking at a credit union or a bank, review your current deposit accounts and do some online research. Your deciding factors might be:

  • Convenience of branches
  • Convenience of ATMs
  • Interest rates on deposits
  • Interest rates on credit and loans
  • ATM fees
  • Customer service at branch
  • Ease of online banking
  • Perks available to you based on where you live or work

Do you prefer a bank or a credit union? If you've tried both, which worked out better for you?

This Guide to Money answer includes the topics: Save, Banking.

Michele Lerner is a freelance writer with twenty years of experience writing articles and web content for newspapers and magazines on topics related to real estate, personal finance and business. Her clients include The Washington Times, Urban Land Magazine, NAREIT's Real Estate Portfolio, and numerous Realtor association publications. Michele's first book, "HOMEBUYING: Tough Times, First Time, Any Time" is available now at Amazon.com or from www.MicheleLerner.com

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