Following Silicon Valley Bank's (SVB's) implosion this year — not to mention the consequent venture capitalist bailout — only 10% of American consumers say they have confidence in the country’s banks, according to a recent poll. And we don’t blame them. If a bank run can topple a $212-billion financial institution, there’s something wrong with the system. While we all wait for more regulation, there is one lesser-known alternative to traditional banks: your local credit union. In this guide, we’ll compare both commercial banks and credit unions so that you can decide which financial institution is best for you.
What Is a Credit Union?
Credit unions are nonprofit organizations that are owned and controlled by their members, many of whom share a common professional, religious, or geographic background. Their nonprofit status means that rather than putting profits and shareholders first, credit unions prioritize their members. That often means credit unions offer lower interest rates on loans, higher interest rates on savings, and lower fees.
The National Credit Union Administration (NCUA) regulates these financial institutions and insures $250,000 per depositor and per credit union. So if a credit union goes bust, you’ll get your money back (unless you’re stinkin’ rich).
For all their perks, credit unions are so small that they come with certain drawbacks. There may be few branches and ATMs, financial offerings beyond the basics might be sparse, and their apps and websites could be outdated. Traditional banks also beat credit unions when it comes to consumer satisfaction, according to the American Customer Satisfaction Index’s 2021-2022 finance study.
Pros of a Credit Union
Better rates on loans, savings accounts, etc.
Easier to qualify for loans.
Lower fees.
Deposits insured up to $250,000.
Motivated by member well-being, not profit.
Cons of a Credit Union
Fewer branches and ATMs.
Fewer financial products.
Outdated tech.
Overall lower consumer satisfaction.
Photo credit: designer491/istockphotoWhat Is a Bank?
Banks are private, for-profit institutions owned by stockholders. Consequently, they’re profit-driven businesses that put shareholders first, with the goal of generating money for their shareholders from fees and interest. Because of that business model, they’re likely to provide less competitive rates compared to credit unions.
That said, there’s a reason most consumers bank with large commercial banks. Because of their size, they have many brick-and-mortar locations and ATMs, the latest tech, and plenty of financial products beyond a checking account. And, as we know following the whole SVB debacle, they’re regulated by the Federal Deposit Insurance Corporation (FDIC), which insures deposits up to $250,000.
Pros of a Bank
More branches and ATMs.
More financial products.
The best tech.
Higher consumer satisfaction.
Deposits insured up to $250,000.
Cons of a Bank
Worse rates.
Harder to qualify for loans.
Higher fees.
Driven by profit.
Gallery: Banks' Most Embarrassing (and Expensive) Mistakes
Photo credit: sshepard/istockphotoAre Credit Unions Safer Than Banks?
Both credit unions and banks are backed by regulations that insure deposits up to $250,000. So unless you've got a lot of money sloshing around, your money is safe at both institutions. Banks, however, are more likely to fail, as they often hold more uninsured deposits that rise above the $250,000 threshold. Whereas more than 91% of credit union deposits are insured, only about 46% of deposits are insured at commercial banking giants Wells Fargo and Bank of America. (For reference, nearly 94% of deposits at SVB were uninsured).
Are Credit Unions Better Than Banks?
The key difference between a credit union and a bank is that they have different motivations. As nonprofit institutions, credit unions put customer service first, offering the best rates and lowest fees around. On the other hand, commercial banks want to make money, so they’re happy to pile on the fees and jack up interest rates. And yet … consumers seem happier at banks. The only explanation is that while credit unions might have your best interest at heart, they just aren’t as convenient and slick as massive commercial banks.
The bottom line: If you don’t mind sacrificing convenience and enjoy in-person service, join a credit union. Otherwise, commercial banks — despite their greed — are likely the more convenient option.
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