Traditional Banks VS Credit Unions


Most people don’t know the difference between JP Morgan Chase, the largest bank in America, and say, One Nevada Credit Union which is a credit union local to Nevada. A bank is a bank is a bank, right? Wrong! Not all banks are created equal and there are some big differences between the Bank of America on every corner and the Credit Union inside your local grocery store. Today, we’re going to talk about them.



Tax Status

The biggest difference between a bank and a credit union is the tax status of the business. Banks are for-profit businesses. Credit unions are non-profit organizations. What’s the difference between non-profits and for-profit businesses? Non-profits don’t have to pay income tax on the business income and the profits for the business are put back into the business to utilize the resources and the company’s mission. Non-profits are usually built to help society’s needs. Based on this status alone, a bank’s purpose would be to maximize profits for their owners/CEO’s/board members/employees, while minimizing the cost of running the business. Credit unions are created with the community in mind and what the member needs.


Your Status

With a bank, you’re a customer or a client. You’re essentially a number. While that sounds harsh, it’s a reality. Just like when you go shopping at Target, if you decided to stop shopping at Target, odds are, you wouldn’t hurt their bottom line. If you left your Chase Bank, their bottom line wouldn’t be affected much. Think back to the Wells Fargo scandal [link:https://money.cnn.com/2018/02/05/news/companies/wells-fargo-timeline/index.html], where Wells Fargo was creating fraudulent bank accounts and credit lines that customers weren’t aware of. They’re hurting this year, but that is their fault and they’ll admit that. They’re still settling disputes with customers from the 2016 scandal and there is the asset cap the fed has put on them. However, Wells Fargo is still standing, still running, still operating. They’re rebuilding what they fixed, but they’re still in business as of today.


Credit unions are local, smaller and it would be wise to consider them more of a small business. With credit unions, you are a member of the union. Usually, that includes part ownership in the credit union and you’ll get paid dividends when investments go well. In banks, dividends go to the owners. The members are the owners of a credit union, therefore your status is not just customer, it is member or owner. You’re not just a number.



Community

We already mentioned to think of credit unions as small businesses. Think of you favorite mom and pop restaurant, you won’t find them when you travel outside of your city. Your favorite pizzeria, unless it’s a pizza hut, is probably just near your house and not a place you can visit when you go out for your summer vacation. The same is true for credit unions, they are local banks that are just in your community. Where as the Bank of America or Chase have many locations all over the country and sometimes the world.


It would seem like the no-brainer would be to choose a bank over a credit union, especially if you travel a lot or want easy access to ATMs or bank locations. However, something to consider is the community the bank cares about. Your local credit union will be the place that supports the youth baseball team. They might even sponsor the soccer team. You won’t find your local Chase branch doing that.



Fees and Loans

On average, credit unions have lower interest rates on loans and higher interest rates on accounts than banks do. This means you’ll pay less in fees for overdraft fees at your credit union than at your bank. Banks are in the business of making money and they need the higher fees so their profit margin stays where they want it. Credit unions care about their members and are interested in what the member needs. For this reason, a lot of credit unions don’t have minimum balance requirements or direct deposit requirements for their checking accounts. Banks generally charge fees in order to have a checking account with them. However, if you want a no-fee checking account with a bank, there is usually a list of financial back bends you can do in order to keep your account “free”. If you drop below the daily minimum balance or switch out a direct deposit, or anything that would take you out of the list that allows the account to be free, you’ll be charged the account fee. There are also banks that will charge a maintenance fee and not give you a way to get out of it.


When it comes to actually getting a loan through a bank or a credit union, there are big differences in how these businesses work. A bank, being bigger does have more access to funds to allow for larger loans. They can handle big corporate loans where as credit unions might be limited in how high of a loan amount they can offer. If you are ever considering a personal loan, credit unions are more likely offer them before a big bank will.


The approval process for loans also differ between banks and credit unions. Banks, being bigger, try to make the application process seamless but it also comes with income requirements, credit score requirements, and a strict process. Banks submit all the information and then the computer, the system, whatever you would like to call it, will send out the decision on whether or not you’re approved. Credit unions have more flexibility in what they offer and more flexibility in their approval process. If you’re credit score isn’t necessarily the greatest, your credit union can work with you to set you up with the right product you need but also work with you to ensure approval. Credit unions allow for a more personalized process.



Education

There are enough statistics out there that shows that most Americans don’t know all the ins and outs of finance. Which is okay, why would you study something you’re not working with every day? Which would be a good argument if you were explaining why you didn’t know anything about business finances or the tax code.


Personal finances is something that everyone should know about. The divide on this ends up coming from who should be teaching concepts of personal finance—schools or parents. The debate, while not huge or even really talked about, is showing its existence and effect on the world through our money habits. The average American has more in debt than what the average American makes in a year. Clearly, we’re missing something.


Banks don’t offer workshops or seminars or much in the way of education when it comes to personal finances. They’ll have brochures to hand you or pages on their website that explains the services they offer. Most banks offer general advice when you’re talking to a banker about something specific, but most don’t offer much in the way of education. Credit unions, on the other hand, usually offer programs to their members to help them reach their financial goals.


Leveling the Playing Field

Throughout this list we have talked a lot about banks and credit unions and some of these points bring out the downside to banks in comparison to credit unions. There are a lot of good reasons to pick a credit union over a bank. In the spirit of keeping things fair and unbiased though, here are some cons to credit unions that haven’t fit into the above categories.


Credit unions can get exclusive.

Unlike banks, where you can walk into any one to open a bank account, credit unions will sometimes have membership requirements that centers around a type of affiliation. For example, there are credit unions for teachers. There’s Navy Federal Credit Union that you can only join if you are a servicemember or a vet or have a military connection. There are some that you just have to meet a location requirement, like living in the state, but a majority of credit unions do have membership requirements.


Credit unions still have fees.

Some credit unions may require an application fee or a membership fee. These fees are usually low-cost but they still might be annoying and less attractive if you can fit into whatever exemption list a bank might offer for a “free” checking account. Membership fees or application fees don’t come with an exception list, usually. Also, this membership fee might have to sit in a separate account, where you cannot touch it, for however long you are with the credit union. Banks might have a deposit minimum in order to open an account but you still have access to that money.


Credit unions might not be fully up to tech standards.

In 2020 we have come to expect that businesses have an app. We expect to be able to handle things in life on our phones, on our computers and not have to always walk into a bank branch. Banks usually have more invested in technology advancement over a credit union. So you might have to go into a bank branch for most transactions with a credit union. In comparison, all big banks have an app and allow for money transfers and mobile deposit all within the app.


At the end of the day, it will come down to personal choice and what you need as a banking customer. Some people have had bank accounts with big banks for years and have never had a single issue or complaint. Others have had the same experience with a credit union. Not all people are the same nor do they have the same needs, this is why it’s good that not all banks are created equal. Hopefully this post helps explain the differences between a bank and a credit union and you’ll feel more confident in your banking decision.


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