Credit unions vs banks

My bank just informed its customers that a free checking account is no longer free. So I’ve decided to look into switching to a credit union.

Credit unions are not-for-profit financial cooperatives serving groups of members who have something in common such as employment at a company, membership in an association, or residence in a particular geographic area.

A credit union serving anyone who lives or works within a particular geographic area is called a community credit union. A credit union that serves groups of employees or associations is typically called an SEG-based (for select employee group) or a sponsor-based credit union.

Credit unions are similar to traditional banks in the sense that both offer financial products and services… giving members access to checking and savings accounts, CDs, loan products, and credit cards. You can set up a savings account (which they call a “share” account), purchase a Certificate of Deposit (i.e. CD), get an auto loan, and (at many) apply for a home mortgage.

A credit union is like a bank, except instead of being a for-profit business, it only exists to service its members. As a result, these non-profit credit union often have better interest rates than other banking institutions.

With a bank, you’re a “customer.” But with a credit union, you’re a “member.” A bank’s percentage of profits go to shareholders, while a credit union’s percentage of profits are returned to its base of members.

Are you sold on joining a credit union?
Here’s how to find a credit union – just type your ZIP Code here…

Like anything in life, switching from a traditional bank to a credit union offers various upsides and downsides:

Pros

Free accounts
Most credit unions don’t charge account-maintenance fees, or loan arrangement fees (or the many other fees that banks do).

The latest surveys show 3 out of every 4 credit unions offer FREE checking and savings’ accounts. Only 4 out of every 10 traditional banks offer free accounts (and that percentage continues to dive lower).

Your initial membership deposit opens your credit union account. After that, that’s it – you never pay a monthly “maintenance” account fee ever again. And 100% of your initial deposit is yours to spend as cash.

Higher interest rates
Banks are allowed to loan out money they create out of thin air. Under fractional reserve banking, traditional banks are allowed to loan out at least 10 times the amount they have on deposit. Banks make money by loaning out this money they create called credit (M3). They charge interest on this credit they create…

… Credit unions on the other hand can only lend out what people deposit into the credit union and nothing more.

Credit unions can’t create money out of thin air through fractional reserve banking. As a result, credit unions pay higher interest rates on deposits. These higher rates give an incentive for depositors to keep their funds in the accounts longer (and in larger balances) than in a regular bank. As a result, credit unions loan out a portion of the deposits without creating new money. Credit unions only receive 10% of the interest income that regular banks get because they can’t lend out 10 times the deposits.

And the best part is when your credit union is profitable, you get a surprise, bonus dividend on your savings’ balance.

Bigger safety net
Credit unions are typically stronger because their business model is not based on fractional reserve banking. And the numbers prove it – for every 100 bank failures, about 20 credit unions fail.

Yes, banks and credit unions offer their “customers” and “members” free insurance on their funds (currently up to $250,000) in the worst-case event of an institutional failure. But if the insurance company has financial problems, it might be all but impossible to collect on this insurance.

Faster, easier loans
With a credit union, we typically get a loan decision within a day or so. Plus, credit unions offer lower interest rates on credit cards and loans than banks. And closing costs generally are much lower than those paid through a conventional lender.

Free coin counting
Credit union members are able to count their unwrapped coins for free with a self-serve coin-counting machine (usually found in their lobby).

Lower ATM fees
It’s always free to use a credit union’s cash machine when you’re a member. Banks are the same way. But when credit union members use an out-of-network ATM, the fees average 36% less than a typical bank’s surcharges.

Lower overdraft charges
Credit unions still hit your pocketbook hard if you overdraw your checking account… but you generally save 15% as a credit union member (compared to standard bank overdraft fees).

Cheaper car loans
In most cases, credit unions offer more benefits for those buying a car.

Savvy car shoppers get a pre-approved loan from their credit union. This way, you know EXACTLY how much car you can afford to get before you enter a auto dealer’s showroom.

More flexible for bad credit risks
Those with less-than-stellar credit might be able to find more flexibility with their credit union.

Cons

Membership requirements
Unless you have a history of bouncing checks, you can walk into any bank and open an account in minutes…

… But most credit unions are different. They require a relationship with a group… for example, a corporation’s credit union may only accept employees and their immediate family members. A credit union for teachers, on the other hand, may accept any teacher who works for a certain school district. A few credit unions have more relaxed requirements and may simply request that members live in a certain city or area.

Mortgages cost more
Believe it or not, banks typically offer lower interest rates on home buying than a credit union.

Less convenience
Some banks have branches and cash machines available throughout the country or region…

… But credit unions have fewer branches (and even fewer ATMs).

Less options
Big banks have invested heavily with online banking. Credit unions are behind the curve a bit (although are slowly catching up). And if you’re looking for foreign currency transactions or use apps that allow you to pay bills on your smartphone, you might be out of luck with most credit unions.

Less rewards
Big banks leverage their “bigness” and typically offer juicier credit card reward perks.

So which type of bank should you choose?

Personally for me, since it costs me nothing, I’m ready to open a credit union account as a backup.

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