September 14, 2023How Credit Unions Differ from Banks
From the outside, credit unions appear very similar to banks. They both offer similar financial products and services, from savings and checking accounts to loans and credit cards. However, it’s essential to recognize the significant distinctions between these two entities because they can greatly influence your day-to-day financial well-being.
For example, credit unions are not-for-profit, and their loan rates are generally lower than competing banks. This variance alone can save you a significant amount of money. Keep reading to learn about all the perks that accompany credit union membership.
What is a Credit Union?
Credit unions are not-for-profit financial cooperatives that serve a distinct membership group. Yes, that’s a mouthful, and it can be quite confusing. In short, these financial institutions exist to provide an alternative to traditional banking – with their members being the key focus.
To better understand how credit unions operate, it’s helpful to break their differences into five key areas: structure, pricing, regulation, membership, and cooperation.
Key Difference #1 – Structure
Banks are for-profit institutions that are made up of a combination of customer funds and outside investors. In contrast, credit unions are not-for-profit, and their funds consist strictly of member deposits. In short, they operate in the following fashion:
- Members’ deposits are pooled together.
- The credit union then invests that money or lends it to other members in the form of auto loans, mortgages, credit cards, etc.
- Any income generated is used to cover operating expenses and provide new technologies for members. As not-for-profit institutions, any additional revenue is returned to the members.
A significant difference is that banks have customers, while credit unions serve members. Each member is part owner of the credit union and has an equal say in how the institution operates. Members can nominate and vote for individuals they feel best represent them on the volunteer Board of Directors.
Key Difference #2 – Pricing
Large banks rely heavily on outside investors. You might own stock in many of these large financial institutions. Their goal is to offer competitive financial services while generating a significant return for their stockholders.
In contrast, credit unions are not-for-profit. This feature allows them to place greater focus on their members and provide significant financial perks. Earlier, it was mentioned that credit unions return their profits to their members – so how do they do that? It occurs through four main categories:
- Lower Loan Rates: Because credit unions do not need to generate a significant profit for stockholders, they can charge less for services like loans.
- Higher Savings Yields: Profits are regularly returned to members in the form of higher dividend rates on savings, money market, and share certificate accounts.
- Lower or Eliminated Fees: Many common fees at banks are much cheaper at credit unions, or they might be eliminated entirely.
- Services at No Cost: You’ll often find many products and services that banks regularly charge for available for free at credit unions as part of their membership benefits.
Key Difference #3 – Regulation
Both banks and credit unions are regulated and monitored by US government agencies. They operate in a similar fashion, and the key difference is the entity that oversees each institution.
Banks are regulated by the Federal Deposit Insurance Corporation (FDIC). In contrast, the National Credit Union Administration (NCUA) monitors credit unions. Both agencies create rules and regulations to govern these financial institutions. And both types of institutions regularly undergo examinations to ensure they are operating legally, ethically, and in the best interest of their customers or members.
Likewise, both agencies federally insure each customer’s or member’s deposits up to at least $250,000.
Key Difference #4 – Membership
Anyone can join a bank. If you meet the legal requirements, most banks will accept you as a customer. However, credit unions are different. They exist to serve a specific group of members or field of membership. Common fields of membership include:
- Employer: Many credit unions serve the employees of a specific company or entity. For example, it’s common to find institutions that strictly serve military personnel or the US Postal Service. Other credit unions serve multiple employers within a specific geographic location, allowing both large and small businesses to offer credit union membership to their employees.
- Geography: It’s becoming more common today for a credit union’s membership to extend across a specific geographic area. For example, anyone that lives, works, worships, or attends school within a particular county can join ABC Credit Union.
- Affiliations: Other credit unions serve specific organizations like unions or religious groups.
- Family: If you’re a member of a credit union, most institutions will allow your immediate family members to join as well.
PEFCU’s field of membership goes by employer. If you are a Publix associate or retiree, work at the City of Lakeland, or a few other select employer groups, you are eligible for membership!
Because credit unions are restricted to a specific field of membership, their footprint is much smaller than today’s big banks. Institutions like Bank of America can span nationwide and reach across the globe. However, don’t let their smaller size fool you – credit unions offer leading technology and financial services that members can enjoy from anywhere. And they do it through a unique aspect of the credit union industry called cooperation.
Key Difference #5 – Cooperation
Credit unions were founded on cooperative principles. They pool their members’ money together to help benefit everyone. Likewise, credit unions across the country pool their knowledge and resources together to help one another better serve their members.
This cooperative nature allows credit unions, big and small, to share in the cost of developing and implementing new technologies and services. It provides access to financial products and account securities that one institution alone might not be able to create or afford.
Additionally, many credit unions participate in cooperative programs that allow each other’s members to conduct transactions at one another’s branches or ATMS – providing members with nationwide access to their financial accounts.
The cooperative spirit of credit unions allows them to reach far beyond the one or two counties they might serve locally.
We’re Here to Help!
Becoming a credit union member offers a slew of financial benefits that can greatly impact your daily well-being. You can save money through lower loan rates and earn more on your savings and investments. It’s a win-win for your wallet!
To learn more about joining PEFCU or if you have questions about your membership benefits, we’re ready to help. Please stop by any of our convenient branch locations or call 800-226-6673 to speak with a Member Advocate today.
Each individual’s financial situation is unique and readers are encouraged to contact PEFCU when seeking financial advice on the products and services discussed. This article is for educational purposes only; the authors assume no legal responsibility for the completeness or accuracy of the contents.
Federally Insured by NCUA