Although banks and credit unions are very similar, specific differences exist between the two. The more you know and understand these differences, the better your chances of finding the best options for your financial needs. Below, we’ve detailed a few main differences that’ll help with your decision-making.
What is a bank?
Banks have been the bedrock of wealth management since the oldest surviving financial institution was established in 1472. Many banks worldwide are licensed by governments to manage deposits and loans for the business world. As a business owner, dealing with a bank has increasingly become the standard practice, as banks act as partners to complement business efforts for scale and competitive advantage.
Today’s online banking world has even taken convenience up a notch for businesses of all types. From a pawn shop in Newbury, OH, to a clothing store in New York, business customers can manage all their financial information and affairs in one place. Beyond offering business services, a bank can also be a great place for individuals seeking the best deals for their money and personal loan services.
What is a credit union?
Credit unions or financial cooperatives are not-for-profit traditional banking service providers. The main aim of a credit union is to oversee the financial well-being of its members by limiting membership to individuals related by a common bond such as community, faith, or industry.
Credit unions continue to grow in adoption partly because the digital disruption is fueling their growth. According to the National Credit Union Administration (NCUA), federally insured credit union membership grew by 122.3 million members as of June 2020.
Also, the popularity of a credit union is due to the social trust it affords cooperative members. Today, many modern unions prioritize their virtual services, making it easy for outside members to access the full details of becoming cooperative members. Suppose you move to a new area in the U.S. like Rockford. You can quickly search for “credit union in Rockford, MI” and receive significant information about a specific union and how to get on board.
What are the main differences?
The specific differences between banks and credit unions can be seen along the following lines:
1. Business Model
Banks exist entirely for profit. As of the second quarter of 2021, the global banking industry had a market capitalization of over $7 trillion. McKinsey argues the sector would have risen by several trillion more if not for the COVID-19 pandemic. Unlike banks that prioritize profits, credit unions put members first. The financial gains of credit unions return to members as additional earnings on deposits or periodic dividends.
2. Tax Status
Both credit unions and banks accept deposits, but credit unions don’t pay taxes on corporate income taxes because of their nonprofit status. Some credit unions may even receive subsidies from parent organizations in critical financial situations. On the other hand, banks pay corporate income taxes on earnings and several other government-mandated taxes.
3. Product Offerings
Banks have the financial muscle to field and sustain more products than credit unions. Many credit unions limit the scope to savings, checking, and credit card services. They may offer several other products, including individual retirement accounts (IRAs) and money marketing accounts.
Which one should you choose?
Choosing between credit unions and banks might be a hard task, but knowing your financial objectives and risk tolerance levels can simplify the decision-making. Generally, banks may tick as the best choice because of their financially encompassing offerings and scope limits. Banks can also afford nationwide convenience and top-notch banking services. However, a financially stable credit union can be your best bet if you seek lower rates and higher annual percentage yield (APY). Personalized customer service can also be a plus that credit union patrons can enjoy.
We hope this article helps you determine whether a credit union or bank is most suitable for your needs.