At the tender age of 16, my mom and I walked into a branch of the Teachers Federal Credit Union and opened up a joint account. They printed out a little card, laminated it, and handed it to me. I stuck the little bluish green card into my velcro wallet and felt like I'd aged just a little bit more.
I didn't know much about money back then. I knew I had a bank account and I could, from time to time, log in to a website and see how much I had saved.
When I went off to college in Pittsburgh, I opened a PNC Bank student checking account because they had ATMs on campus and a branch just down the street. The student checking account was the perfect product for a poor college student. PNC Bank was, to the best of my knowledge, my first commercial bank account.
Back then, I didn't know the difference. They were both financial institutions. They both had ATMs. For all practical purposes, they were the same.
It wasn't until I was older that I learned they weren't the same. Similar, but not the same.
The Key Difference
There is really very little practical difference between a commercial bank and a credit union.
Structurally, and dare I say philosophically, they're very different. A credit union is a financial cooperative, owned by the members who have deposits at the bank. A credit union is created for the benefit of its members. All depositors are owners, regardless of balance, and get a vote in board member elections.
A commercial bank is a for-profit institution, often times traded on the stock market. They are owned by shareholders and look to turn a profit for those shareholders. A depositor is merely that, someone who deposits their money at the bank. The bank's goal is to earn as much of a return as possible on those deposits.
There may be a tendency to think that credit unions are “good” and commercial banks are “evil” but it's more nuanced. It's about their responsibility. Both are responsible to their shareholders. The difference is who is a shareholder at each institution. A depositor is a shareholder at a credit union. A depositor is not a shareholder at a commercial bank, the folks who own shares of stock are the shareholders.
Understanding this key difference can inform the other differences.
A commercial bank has no eligibility requirements.
A credit union, by law, must have a restriction based on affinity (membership to an organization), geography, or some other affiliation. Once you qualify, you qualify for life even if the affiliation changes.
For example, my first bank account was with Teachers Federal Credit Union on Long Island, New York. Here are its eligibility rules: “Persons who live, work (or regularly conduct business in), worship, or attend school in and businesses and other legal entities located in Nassau County, New York, or the following portions of Suffolk County, New York can join TFCU: Town of Huntington; Town of Babylon; Town of Smithtown; Town of Islip; Town of Brookhaven; the Poospatuck Reservation; Town of Riverhead; or Town of Southold”
My mom worked for the Three Village Central School District, located in Suffolk County, and I qualified as her child (technically, we opened a joint account when I was a minor, so it was really still her account too). It was called Teachers Federal Credit Union but you didn't have to be an educator or work in the school system.
By comparison, almost anyone can walk into a Bank of America and open an account.
(I say “almost anyone” because to open an account you may need to provide two forms of ID and a Social Security Number – if you don't have those it can be difficult to open a bank account)
Credit unions generally have a much smaller geographic footprint. They can sometimes get around this by joining ATM networks so their reach is that much greater. Tower Federal Credit Union has just 12 branches in Maryland but they fill in the gaps with dozens of ATMs. They don't have a presence outside of the region though. Some credit unions, recognizing their limited geographic reach, will offer ATM rebates/reimbursements to overcome this limitation.
Not all credit unions have a limited geographic footprint. Navy Federal Credit Union has nearly 300 branches in 199 cities and thirty states. They are part of the CO-OP Network ATMs (30,000), CashPoints ATMs (1,100), as well as 2 million Visa?PLUS System ATMs. As you can see – they have a pretty big geographic footprint for a credit union.
They, however, can still be relatively small compared to a commercial bank. Wells Fargo has over six thousand branhces. Bank of America has over five thousand.
Online-only banks that do not have physical branches, like Ally Bank, have partnered with large ATM networks like Allpoint (55,000 ATMs) and they offer ATM fee reimbursements. Ally Bank will also reimburse up to $10 at the end of each statement cycle for ATM fees.
FDIC vs. NCUA Deposit Insurance
Both are protected by deposit insurance but by two different organizations.
Credit unions are federally insured up to $250,000 by the National Credit Union Administration (NCUA). Commercial banks are federally insured up to $250,000 by the Federal Deposit Insurance Corporation (FDIC). Both NCUA and FDIC are backed by the full faith and credit of the United States Government.
For all practical purposes, NCUA and FDIC coverage is the same. They are separate organizations but they're funded in similar ways.
Since the credit union is owned by the depositors, they tend to pay higher interest rates on deposits and charge lower interest rates on loans.
Higher interest rates on deposits. This is often true when you compare brick and mortar commercial banks with brick and mortar credit unions. When you introduce online banks into the comparison, high yield savings accounts will have higher rates than both. This is true also for money market accounts.
In early April 2018, I compared the rates of those three categories, I found that brick and mortar commercial banks paid the least (often 0.01% APY!), credit unions came in the middle with around 0.50% APY, and online banks were around 1.50% – 1.70% APY.
Credit unions beat regular banks but still can't compete with the economics of online banks.
Lower interest rates on loans. I compared auto loans at Tower Federal Credit Union (a local CU to where I live now in Howard County, Maryland) with Bank of America and found a big difference.
- The interest rate on a 60-month loan for a new car at Tower Federal Credit Union is 2.24%.
- The interest rate on a 60-month loan for a new car at Bank of America is 2.99%.
Your actual rate will differ based on factors like credit score but even the blind rate differs by 75 basis points.
As you can see, the institution maximizes financial benefit for whomever is their shareholder. Credit unions have higher deposit interest rates and lower loan interest rates because they're trying to maximize financial benefit to depositors. Commercial banks do the reverse because they're trying to maximize profit for shareholders.
Which Is Better?
Credit unions offer a better financial product than brick and mortar commercial banks but are limited in their size and geographic footprint. If you leave the immediate area, your financial life will be slightly more cumbersome and require a little up-front planning.
It is, however, hard to argue against online-only banks though. The economics of a bank without physical branches gives it an edge because their costs are far lower. They have higher interest rates on deposits and lower interest rates on loans because they can afford it. They have no geographic footprint so they partner with ATM networks to fill the void.
That said, there is one credit union on our list of the best high yield savings accounts. Alliant Credit union is a credit union located in Chicago that has a high-interest rate savings account, large ATM network, and reasonably large affiliation network.
Personally, I do not have a credit union because I haven't found that that is better than an online bank.
The best option for you will come down to your needs.
What About Local Banks vs. Credit Unions?
If one of the biggest knocks against larger banks is that they're impersonal, would a local bank be better?
Maybe. Local banks are still commercial banks, so the financial responsibility of the bank is to earn money for its shareholders. Local banks may also be unable to compete financially with national banks due to economies of scale. But one thing they do have is flexibility and building a relationship with branch managers and loan officers can impact some of the decision making process to a small degree.
Lastly, and this might be useful at your next trivia night, but taxpayer funds have never been used to bail out a credit union. 🙂