Banks vs. Credit Unions: How Are Credit Unions Different?

I will admit, before I started working at a credit union, I didn’t even know the difference between a bank vs. a credit union. But, I sure learned during my first week of training after I was hired! I remember as a kid seeing credit unions and asking what the difference was, yet no one could tell me. Even now, I have members who ask me if we are FDIC insured and are shocked and confused to find out that we aren’t.

In light of all the bailouts, Occupy Wall Street, big bank fees, etc., people are becoming more and more aware of smaller community banks and credit unions. We saw a lot of new members last year when November 5th, 2011 was declared “Bank Transfer Day.” What I hear a lot of is “banks are bad, credit unions are good!” - but many people don’t really know why. So, I am here to answer some of the most commonly asked questions which I hear on a regular basis:

What is a credit union?

A credit union is a not-for-profit cooperative. Not-for-profit doesn’t mean non-profit; credit unions obviously do have to make some profit for themselves in order to keep the lights on and pay employees to show up. But any extra profit above what is used for operations and investments is paid back to the members as savings in the form of higher dividends and lower interest rates on loans.

The first credit union actually originated in Germany in the 1800s and they spread through Europe before coming to the Americas. Instead of having to please stockholders like banks do, credit unions are governed by a Board of Directors, as well as the members themselves.

What does a credit union do?

Other than how it is owned and operated, a credit union offers all of the same products as your local bank. Gone are the days of the Savings & Loan institution most are familiar with; now at your local credit union you have various checking options (in fact, you’re more likely to find a truly free checking account with no strings attached there), online and mobile services, debit cards, retirement options, and loans of all types among other services.

A credit union is simply the steward of the members’ money and in all decisions (including opening new accounts and lending money) must first think about what is best for the membership.

Who can join?

When they first started, and still today in smaller credit unions, you had to be an employee of one of the credit union’s Select Employer Groups (known as SEGs) in order to join. But many credit unions have received community charters in order to open up their field of membership. This means that often if you live, work, etc. in a certain region (city, county, etc.) you are eligible to join as well. You can always check out the institution’s website or give them a call to find out their field of membership and if you qualify to join.

Who owns the Credit Union?

If you have an account with a credit union, then you do! Credit unions are owned by the members. That’s why you’re called a member instead of a customer, and that’s why your savings are called your “shares:” because that’s your share of the credit union, just like stockholders own shares of a bank. If you are a member of a credit union, you will have the chance to have a say in what goes on by attending annual meetings among other events.

Are my funds insured?

Absolutely! Just like the FDIC (Federal Deposit Insurance Corporation) insures banks, but the NCUA (National Credit Union Administration) insures your credit union accounts. It is the same federally backed protection. The NCUA insures share accounts up to $250,000 per account, but in addition to that, some credit unions purchase extra insurance so that your funds are even more protected. However, check with your institution because they may offer other financial services which are not protected by the NCUA, such as certain investments.

These are many technical aspects of how a credit union operates, and are real questions that I hear often. But the bottom line recently has been that many people enjoy the more personal feel of a community credit union, and enjoy greater member service at a place where they feel they are treated as a real person with a name, and not just an account number. Of course not all banks are “bad,” I myself am a proud customer of PerkStreet. Ultimately, it is up to you to decide what works the best for you and your situation.

For more information on banking, see our banking page.

Are you with a bank or credit union? Give your thoughts on your institution in the comments section below!

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