Banks vs. Credit Unions — Which Is The Best Option?

Banks vs. Credit Unions: We cover the difference between these financial institutions and the pros and cons of both for borrowers and savers.

banks vs. credit unions

Credit union versus a bank–which is best for you? It’s a question that is not easily answered. While there are significant differences between the two, there are also a lot of similarities. Whether a credit union or bank is best depends upon what is most important to you.

Choosing between a bank or credit union has become a serious question in recent years. Banks have been increasing both the number and the amount of their fees. Credit unions have come on strong as an alternative to banks.

Let’s consider the differences to help you make the best choice for you.

Resource: Best interest rates on savings, checking and CD accounts.

Banks can be International, Credit Unions are Local

Many large banks have international operations. That means that they can handle transactions to and from foreign countries, and even enable you to transact business when you are traveling abroad.

Many banks are also multi-state concerns. That means that you can easily transact business with the same bank when you are traveling in other states. In addition, large banks tend to have thousands of locations, which is a major advantage — not just from a customer service standpoint, but also in regard to automated teller machines (ATMs).

Credit unions, on the other hand, tend to be local organizations only. Many have only a few branches located in your immediate area. This can make transacting business at long distances somewhat problematic.

However, credit unions have gotten around the ATM limitation through the CO-OP Network. It means that a credit union can enable its members to access more than 30,000 ATMs, and over 5,000 branches, all across the country.

One of the credit unions that I bank with has added ATM access at Rite Aid drug stores. Since Rite Aid has more than 4,600 locations, we have fee-free access to our accounts across the country as well.

Banks are More Cutting Edge When it Comes to Technology

At least at present, banks are in the forefront in regard to online banking, mobile banking, and remote check deposit capability.

This may prove to be a temporary advantage. Credit unions are catching up with the technology trail that the banks are currently blazing. For example, my credit union also offers remote check deposit capability, as well as superb online banking.

Nevertheless, if mobile and online banking are important to you, banks are still in the lead.

Banks are More “Democratic”

Credit unions are typically organized around specific, common ground. For example, a credit union may be available only to people who live in a certain geographic location. They may also be based on employment in a certain industry, or even with a specific employer.

It can even be faith-based, or center on a particular trade union or association. You will generally not qualify for membership in a credit union if you do not fit into the category that the credit union exists to serve.

Banks, on the other hand, are open and available to the general public. There is no geographic restriction or employment limitation. This makes banks available to more potential customers.

Banks Work Better for Businesses

Banks, by their very nature, facilitate commercial activities. For example, they offer business loans, and they commonly provide credit card processing services. They can also be highly adept at processing international transactions.

Credit unions are centered exclusively on the individual customer base. Even if you love your credit union for personal use, you will likely need to also have a banking relationship if you have your own business.

For the self-employed, banks are the clear winners.

Credit Unions Pay Higher Interest on Savings

The advantage here goes the credit unions, and it’s not even close. For example, as of March 25, 2016, credit unions are paying an average of 1.52% on a five-year certificate of deposit. The comparable average rate for banks is 1.22%.

On one-year CDs, credit unions are paying 0.49%, compared to 0.37% for banks. (Rates quoted are for CDs in the amount of $10,000)

The situation is similar with money market accounts. On an account with a balance of $2,500, credit unions pay an average of 0.17%, while banks pay an average of 0.12%.

There is one exception to this general rule–online banks. Those banks that operate only online (e.g., Ally, Synchrony Bank) have interest rates that are competitive with and even beat many credit unions.

Related: List of the Best Online Banks

(NOTE: All current interest rate information presented in this article is provided by the National Credit Union Association’s Credit Union and Bank Rates as of March 25, 2016, the latest report available.)

Credit Unions Charge Lower Interest Rates on Auto Loans

Credit unions win again in this category. The average rate on a 60 month new car loan with credit unions is 2.73%. With banks, the average rate on a 60 month new car loan is 4.73%.

The situation with used car loans is the same. The average rate charged on a 48 month loan with a credit union is 2.79%. The average rate charged by the banks for the same loan type is 5.14%.

Credit Unions Charge Lower Interest Rates on Credit Cards

This one is more than a little bit of a surprise, since so many banks so aggressively tout their credit card offers. But the numbers favor the credit unions here, too. The average credit card rate charged by credit unions is 11.62%. For banks, it’s 12.65%.

When it comes to 0% balance transfer offers, however, the major credit card issuers are the clear winner. The longest 0% offers come from the likes of Citi, Capital One, Discover, and Chase.

Learn More: List of current 0% balance transfer offers

Mortgage Rates and Home Equity Loans – Credit Unions Win Again

Credit unions, on average, have lower interest rates than banks on mortgage products across the spectrum. Here is a comparison of the most popular mortgage programs, showing the average rates charged by credit unions and by banks:

  • 30 year fixed rate – credit unions 3.84%, banks 4.02%
  • 15 year fixed rate – credit unions 3.15%, banks 3.30%
  • 5/1 adjustable-rate – credit unions 3.16%, banks 3.47%
  • 3/1 adjustable-rate – credit unions 3.05%, banks 3.39%
  • 1 Year adjustable-rate – credit unions 2.91%, banks 3.35%

Credit unions are also lower on home equity loans. They charge an average of 4.42% on a five-year, 80% home equity loan, while banks charge an average of 5.01%. On 80% home equity lines of credit (HELOCs), credit unions charge an average of 4.08%, while banks charge an average of 4.32% on the same loan type.

Rates: See current mortgage and refinance rates

With Credit Unions, You’re an Owner… Not a Customer

This is perhaps the most fundamental difference between credit unions and banks. While banks are privately or publicly owned institutions, credit unions are owned by their members.

This is the main reason why interest paid on deposits is higher at credit unions than at banks. It’s also why interest charged on loans is lower at credit unions than at banks. Since banks have to earn a profit on operations, those profits must be generated out of the interest rate spread. Because credit union members are also owners, the “profits” are returned to the members in the form of higher interest rates on savings and lower rates on loans.

The owner/member status of credit union users also shows up in another important category.

Credit Unions Have the Edge in Customer Satisfaction

The ownership status of members is evident in the customer service ratings of credit unions compared to that of banks. The American Customer Satisfaction Index gives the clear nod to credit unions when it comes to customer satisfaction.

In 2015, the Index gave banks an overall score of 76, while credit unions scored an 81. In fact, credit unions have consistently outscored banks each year since 2008 (credit unions were not scored prior to 2008).

The consistency of the higher ratings for credit unions confirms that the member/owner connection is a driving force in day-to-day operations.

And the Winner: It Depends

Not the answer you were looking for, was it? But as much as we like the whole concept of winners and losers, this is one of those categories where that isn’t at all clear. Whether you’ll be better served by a credit union or a bank will really depend more on your own personal circumstances.

If you are interested in getting the best rates on savings or loans, or if you only have need for personal banking services, then you will be better served with a credit union. But if you also run a business, or have significant international transactions, a bank will work better for you.

The optimal arrangement might be having a bank for business and international purposes, and a credit union for all of your personal needs. That will give you the best of both worlds.

What’s your opinion – credit unions or banks?

Topics: Banking
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