It’s easy to confuse credit unions with banks. They offer many of the same services and, from the street, their operations look similar. But peek under the hood, and you’ll find major distinctions. Depending on your needs, moving to a credit union could save you some serious money.
What’s a credit union, what’s a bank?
Let’s start with what credit unions aren’t. They’re not banks. Banks have important roles. Their massive funding provides liquidity and lending capacity that keeps the economy going. But they exist to make money for their shareholders, and they need to charge enough for products and services to cover expenses and make a profit. For consumers, maybe the best way to make money from a bank is to buy its stock.
Banks and credit unions come in all shapes, sizes and flavors. Not all banks are a bad deal for consumers, and not all credit unions are the best choice. (Read Is it Time to Divorce Your Bank?).
Banks typically offer at least a distinct advantage in two areas:
Whiz-bang technology. Banks’ size and wealth lets them invest in the latest technology, which, depending on your institution, can mean more-robust online banking or mobile banking offerings. Credit unions are catching up but, generally, they lag in technology.
Credit card rewards. Credit unions excel at offering lower APRs on card balances. Credit cards issued by credit unions, however, rarely top lists of cards best for rewards. Banks and retailers often have better deals.
But if you are looking to save money, borrow at lower rates and enjoy personal service, a credit union may be the best bet for you. Here are 12 areas where credit unions really shine:
1. Better service
Credit unions are cooperatives, owned and operated by members. That means they emphasize consumer value and customer service.
In 2014, three major consumer surveys (The Harris Poll, the Chicago Booth Kellogg School Financial Index and The American Customer Satisfaction Index) found that customers trusted credit unions more than banks.
Says the American Customer Satisfaction Index:
For a second year, credit union members feel that they receive better service and more competitive interest rates than consumers who have accounts or personal loans through retail banks. ACSI’s annual study on financial services shows banks down 2.6 percent for customer satisfaction to score 76 on a 100-point scale.
Credit unions enjoyed a rating of 85 points (of 100) from the survey.
2. More-personal relationships
When phoning your national bank to inquire about a product or service, it may be hard to find someone empowered to make a decision or answer a difficult question. You’re likely to reach a call center and be politely shuffled from one customer service representative to the next.
Money Talks News’ Allison Martin, in 9 Reasons to Love Credit Unions (and Not Big Banks), tells why she prefers a credit union:
The credit unions I’ve joined have been staffed by friendly representatives who knew me by name. I can’t say I’ve had that experience with banks.
3. Expanding membership options
Credit union membership used to be available only to people who worked at certain companies, schools or government institutions. Today, joining is much easier. Many credit unions base eligibility simply on where you live. Credit union membership is growing by about 2 percent a year, says The Washington Post.
4. Higher rates on insured savings
American credit unions are not-for-profit organizations. That means their focus can be serving members rather than making profits. Also, they are exempt from paying federal taxes. These factors can let them pay higher interest on deposits.
“Many credit unions pay ‘bonus’ dividends if the credit union has a good year,” according to The San Marcos Daily Record.
The average credit union offers CD, money market, and savings rates well above the national average for banking rates. The disparity is most dramatic for longer-term savings vehicles such as certificates of deposit, where credit unions pay nearly 50 percent more on five-year CDs than banks.
Compare rates for CDs, interest checking accounts and money market accounts at Money Talks News’ solutions center.
5. Cheaper rates on some types of loans
Credit-union car loan rates can be head and shoulders above banks’. MyCreditUnion.gov, a site of the National Credit Union Administration, quotes from SNL Financial, a banking and business analytics company that analyzed credit union competitiveness in 2014:
SNL Financial found the difference between banks and credit unions was greatest in car-loan interest rates. The average 36-month used-car loan interest rate offered by credit unions was 2.71 percent compared to 5.26 percent for banks. For new-car loans, credit unions offered an average interest rate for 48 months of 2.64 percent compared to 4.78 percent for banks.
The average interest rate at such (credit union) lenders on three-year new-car loans was 2.51 percent as of Dec. 30, (2014) compared with 4.68 percent at banks, according to SNL Financial, a financial-information firm based in Charlottesville, Va. At Navy Federal Credit Union, the largest credit union in the U.S. by assets, the fixed interest rate for a new-car loan of up to three years is as low as 1.49 percent.
For mortgages, credit union rates can be comparable with other lenders though not often stellar. However, The Washington Post says, home equity lines are a standout offering, with credit unions charging an average 4.01 percent vs. 5.73 percent by banks.
6. Lower banking fees
Credit unions are known for lower fees. “Roughly 80 percent of credit unions offer free checking accounts, compared to less than 50 percent of banks,” reports The Washington Post, quoting research by Moebs Services. The Post says fees are 5 percent to 20 percent lower at credit unions than banks.
However, the Post adds, banks waive checking fees more (26 percent, on average, vs. 10 percent by credit unions).
The median overdraft fee (half were more, half less) at banks was $30, vs. $28 at credit unions, according to the Post. But, again, banks were more likely to waive those fees.
7. More ATMs
It seems counter-intuitive, because credit unions are smaller than big national banks, but credit union members often enjoy more free ATM access than bank customers. Explains The Post:
… credit unions — despite having fewer locations — typically give customers access to broader networks of ATMs by sharing branches and other resources. The largest such network of cash machines, dubbed the CO-OP network, offers about 30,000 ATMs across the country.
8. Support for communities
Credit unions and community banks have a track record of investing and participating in local communities. The Institute for Local Self-Reliance, “a national research and policy organization founded in 1974 to advance community-centered, environmentally sound and equitable economic development,” says:
The more the community prospers, the more the local bank benefits. This is why many local banks and credit unions are involved in their communities. Big banks, in contrast, are not tethered to the places where they operate. Indeed, they often use a community’s deposits to make investments in other regions or on Wall Street.
9. Easier credit
Credit unions aren’t charities, of course, but they are known for working hard to help members get loans when possible. Their structure gives them more flexibility. “Because of its unique ownership structure, a credit union doesn’t have to abide by loan restrictions and qualifications mandated by some far-away corporate home office,” blogs The Simple Dollar.
10. Support for small businesses
At credit unions (and community banks), people who live locally make loan decisions. They may know borrowers and are more able to take into account intangibles like community reputation, integrity and accountability. Also, they understand the value to the community of a small business, its market and credit needs.
11. Better credit card rates
If you carry a balance, you’ll probably do better with lower credit union card interest rates. Here’s a comparison of average interest rates on three types of cards issued by banks vs. credit unions:
Rates for three types of credit cards issued by banks and credit unions
*Average rates for March 6, 2015, from CULookUP.
12. Fewer account-maintenance fees
Banks often charge maintenance fees if you fail to keep a minimum balance in your checking or savings accounts.
“Credit unions, formed for the purpose of helping low- and middle-income Americans create savings, have largely avoided monthly account fees for their customers,” writes The Motley Fool.
What is your experience with these two types of financial institutions? Share with us in the comments below or on our Facebook page.