Difference Between Credit Union vs. Traditional Bank | CapWay

Posted by Sha'Kreshia Terrell in BankingMarch 20, 2023(Last Updated March 20, 2023)4 min read
Key Takeaways
  • A credit union is a cooperative financial institution owned by its members and operated for their benefit.
  • A traditional bank is a for-profit institution that accepts deposits from individuals and businesses and provides loans and other services.
  • The main difference between credit unions and traditional banks is their ownership structure and profit goals.
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Credit Union vs. Traditional Bank


Credit Union 

A credit union is a cooperative financial institution owned by its members and operated for their benefit. Credit unions are not-for-profit and generally offer lower fees and higher interest rates on deposits than traditional banks. They focus on providing services to members of a specific group, such as company employees, union members, or residents of a particular area.


Traditional Bank


A traditional bank is a for-profit institution that accepts deposits from individuals and businesses and provides loans and other services. Traditional banks often charge higher service fees and offer lower deposit interest rates than credit unions. They focus on providing services to a broader range of customers, including individuals, businesses, and other organizations.


Profitability Status


The main difference between banks and credit unions is their profit status. Banks are for-profit organizations, meaning they are privately held or publicly traded, whereas federal credit unions are nonprofit organizations. The distinction between for-profit and not-for-profit organizations determines which services and goods each institution offers.


Since a credit union is a cooperative, its members own the organization. Therefore, people with something in common, such as a job, a place of residence, a religious affiliation, or membership in another organization, are typically eligible to join credit unions.


Credit unions are also typically exempt from paying federal taxes because they are nonprofit institutions; some even get financial assistance from the groups to which they are linked. This means credit unions do not have to be concerned with becoming profitable for shareholders.


The credit union aims to offer its members the most affordable terms for their financial products. As a result, members typically receive lower loan rates, pay lower fees, and earn higher annual percentage yields (APY) on savings products than bank customers.


Instead of concentrating specifically on the needs of the account holders, banks are concerned with increasing their bottom line. This is one of the reasons that banks frequently charge higher rates and more fees than credit unions. As a result, banks' annual percentage yields on savings products typically have lower yields than their interest rates on lending, which also tend to be higher.


people having conversation

Image Credit: fizkes / Shutterstock.com 


Benefits of Traditional Banks 


Traditional banks offer a variety of benefits, such as:


Wide Range of Products and Services 


Credit unions focus on a few core services, such as deposit accounts, credit cards, and loans. In addition to standard banking products, many banks offer investment accounts and financial advisory services.


Physical Locations


Many people prefer access to bank tellers and ATMs, preferably in their neighborhood. Though most banking is done online these days, there are times when you need to visit a branch or withdraw cash, which makes banks preferable to credit unions for some customers.


Accessibility of Account Management


Although many credit unions offer online banking, the quality and availability of mobile apps vary. Banks provide a better experience than credit unions if you prefer to bank from your laptop or phone.


Traditional banks can reach a larger audience than credit unions, but that doesn't mean credit unions are without benefits.


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Benefits of Credit Unions


Credit unions offer a variety of benefits, such as:


Greater Flexibility


Credit unions, for example, are more likely than banks to provide checking accounts with no monthly maintenance fees or minimum balance requirements.

Better Interest Rates 


Credit unions offer higher interest rates on savings accounts, which allow your money to grow faster. Also, they offer lower interest rates on loans, making borrowing more affordable.


Better Customer Service


Credit union representatives will provide personalized attention and assist you in identifying the best services for your needs, which often need to be improved in large banks.


Aside from their benefits, credit unions also offer insurance protection.


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advisor showing report

Image Credit: Natee Meepian / Shutterstock.com

Insurance Protection

A common worry is that the Federal Deposit Insurance Corporation (FDIC) does not cover credit unions. As a result, Congress established the National Credit Union Administration (NCUA) in 1970. The deposits into credit union accounts are insured by NCUA, although credit unions are not covered by FDIC insurance.


The FDIC is a federal agency that provides deposit insurance up to $250,000 per depositor, per insured bank, for each account ownership category. So if your bank fails or runs out of money, the FDIC will reimburse account holders for any money owed to them from the failed bank's accounts. Since 1933, FDIC insurance has been in place to prevent bank runs and the panic that resulted when banks failed in the 1920s and the early 1930s.


Credit union members had no such protection if their financial institution abruptly failed before 1970 when the NCUA was established. The NCUA insurance offers up to $250,000 per share owner, per insured credit union, for each account ownership category, much like the FDIC insurance does if the credit union closes or goes into conservatorship.


The NCUA's insurance program covers both federal and state credit unions. If you want to know if your credit union is insured, you can check the NCUA website. Credit unions that are NCUA-insured also always display this information in their branch offices prominently.


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The Money Wrap-Up


The main difference between credit unions and traditional banks is their ownership structure and profit goals. Credit unions are owned by their members and operate as not-for-profit cooperatives, while traditional banks are owned by shareholders and operate for profit. Credit unions may offer more personalized service, lower fees, and higher interest rates, while traditional banks may have more advanced technology and a wider range of services. 


It all comes down to what you value most in choosing a bank or credit union matters most. You must consider every aspect to select the option that best suits your banking requirements.


Main Image Credit: Kevin George / Shutterstock.com

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