What is the difference between a bank and a credit union?

Image courtesy of Wiki Commons
Image courtesy of Wiki Commons

What is the difference between a bank and a credit union?

Are you reading this article because you are fed up with the banks? Maybe you are wondering whether credit unions might offer a fairer way to bank. Perhaps you need a loan, and your bank has turned you down. Or maybe you're just curious. After all, new credit unions are springing up daily. There has to be a reason why there are more of them about.

Everywhere you turn these days you hear nothing but criticism of the banks, and in particular the high bonuses paid annually to staff members. Many people feel angered or alarmed when they read about the millions of dollars or pounds or euros these people receive for managing our money. This level of pay can seem more than a little unfair, especially when your job is threatened by an unstable economy, and you are perhaps struggling to pay the mortgage and put food on the table. But is there another way? Could we shun the banking system and place our money with an organisation that respects our needs, and works hard for both individuals and the wider community? Those who are familiar with credit unions already know the answer to this question.

A credit union is a cooperative financial institution that is owned and controlled by its members and operated for the purpose of encouraging savers, and providing credit at reasonable rates. Many also provide other financial services to their members, such as cashpoint cards and chequing facilities. Some even offer mortgages and insurance. Whilst a few credit unions are affiliated to Trade Unions, or church groups, others are large and well-established community based operations, with a range of facilities similar to those offered by banks. There is also a growing number of tiny, start up initiatives offering only limited services until their membership grows and they become better established. In many instances they provide a viable alternative to the banks, and they are certainly worth a second look.

UK Government provides funding to expand Credit Unions

On the 3rd March 2011, it was announced that the UK Government plans to invest up to £73 million in credit unions over the next four years. The money is intended to fund the continued expansion and modernisation of credit unions, .and the Government is commited to providing access to credit union accounts through the Post Office network. This announcement comes hot on the heels of an interview given to the Daily Telegraph by Mervyn King, Governor of the Bank of England, in which he suggests that " Imbalances in the banking system are growing again and could lead to a repeat of the financial crisis" This may be just one of the reasons that Credit Unions are being given government help and support. During the last banking crisis, the banks were believed to be "too big to fail" and vast sums of taxpayers money were diverted in an effort to 'prop them up'. Credit Unions are smaller, and take fewer risks with their investments. No wonder the UK government is encouraging their growth!


Credit Unions in America

Credit Union, Liverpool, UK

Bankers pay and bonuses

According to the news agency, Reuters (February 2011) - 'The top five U.S. banks will pay staff a combined $119 billion for 2010, up 4 percent from 2009, and average pay for investment bankers at Deutsche Bank and UBS also rose, based on 2010 results.'

In the UK, one of the banks bailed out by British taxpayers, the Royal Bank of Scotland, has just announced losses of £1.13 billion. Despite this RBS says it will pay its investment bankers bonuses of about £950m for 2010.Chief executive Stephen Hester will receive a £2.04m bonus - all in shares - with his salary frozen at the 2008 level of £1.2m.

Why choose a credit union?

Credit unions are co-operative ventures. They are owned by the members, and not by share-holders. This means that any profits can be returned to members as a dividend at the end of each year. Effectively this means that the members get the bonuses rather than the banking bosses. Credit unions are often community ventures that serve a limited geographical area. Others exist to serve the needs of an affiliated group of people who may belong to the same trade union or church group. They generally have a board of unpaid, elected volunteers to oversee their running, thus ensuring that members have a say in who is taking care of their money.

If you are a saver, you will possibly see a higher return on the money you are putting away in a credit union. If you are a borrower, you will benefit from lower interest rates, and fewer hidden extra costs, such as hefty arrangement fees or early repayment penalties. For those who care about others in the community, credit unions provide an easy way to keep money where it can benefit local people most. One very positive aspect of credit unions is that they provide a safe, low-cost avenue of finance to those who might otherwise have ended up paying the extortionate rates of interest charged by loan sharks and payday loan companies.

Recently, the consumer publication, Which?, suggested that people should consider saving with their credit union as a means of giving the banks a wake-up call. Writing on the Which? website, Mike Saville, Principal Researcher for the magazine’s Money section, said: “banks are paying millions of us pitiful rates on our savings. At the same time they’re refusing to lend to anyone without a near-perfect credit score. A short-term solution? It’s time to give credit unions a look.”

The difference between banks and credit unions

The down-side. Why some banks are possibly better (at the moment)

The down-side to all the positives regarding credit unions is that the banks are slick operations. Smaller credit unions may not have ATM machines or credit cards. The really small ones don't even have chequeing (checking) facilities. You may only be able to save or borrow a limited amount in a start-up credit union. The credit union in my nearest town has only been operating a short while, and savers are limited to £10,000, whilst borrowers can only receive up to £1,000. Of course this will grow as more people cotton on, but it's something to be aware of. At the moment your local credit union might not be the banking alternative that you're looking for, but history teaches us that good ideas have a way of overcoming difficulties. The more people join these small, start-up credit unions, the more they will be able to offer.

Having said all that, there are already credit unions that are very well established, and offer a good range of financial services including cashpoint cards, cheque books, and even mortgages. Don't dismiss your local credit union without first investigating what it has to offer. You might be pleasantly surprised.

Banks generally have a great range of products and services available, and your credit union may not (yet) be able to provide mortgages, credit cards, insurance etc., etc. If these are important aspects of your banking experience, then maybe you could try a pick and mix approach. Keep your bank account for the bits that are important, and get a credit union account for the rest.

How to find your nearest credit union.

USA

In the USA over 90 million Americans already have accounts at credit unions. Most credit union in America are members of a scheme whereby deposits of up to $100,000 are covered by a government guarantee similar to that which backs banking deposits. If you are in doubt whether this applies to the credit union that you're thinking of joining, simply ask at the branch. You can find your nearest credit union by logging on to:

http://www.culookup.com/

UK

In the UK, a government backed scheme also guarantees a certain proportion of savers money, and again, it is worth enquiring whether this applies to your local credit union. You can find your local credit union here:

http://www.findyourcreditunion.co.uk/home

You can also find out more about credit unions in the UK here:

http://www.abcul.coop/media-and-research/news/rss

IRISH REPUBLIC (EIRE)

A list of Irish Credit Unions can be found here:

http://www.creditunion.ie/

AUSTRALIA

More and more Australians are also turning to Credit Unions. If you are based in Australia, you can find a Credit Union here:

http://www.cua.com.au/

CANADA

For Canadians looking to find a credit union, you might start your search here:

http://www.cucentral.ca/

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Comments 30 comments

lmmartin profile image

lmmartin 5 years ago from Alberta and Florida

A well written look at credit unions. However, recent history has proven that credit unions are quite liable to failure, especially those under-capitalized (a considerable number.) Not that they aren't a viable alternative, but it is important to check them out very carefully. Here in the US, the corpses of credit unions, savings and loans, small banks litter the streets. In Canada, the situation is more stable, and credit unions have become as sophisticated as the big banks. They have formed a unified network, so ATM services are available coast to coast. I can't speak of the situation in Europe. But I'm sure you can. Great hub, Amanda.


diogenese 5 years ago

I suppose a compromise is the one I use which is to bank with a building society, in my case, Nationwide, which also does not have any share holders to answer to. Of course, it is huge and has some of the disdvantages of the banks, such as charging usurious fines for overdrawing funds, etc. But I have had 5 years with them without many problems and i don't think they are paying out the huge bonuses of Barclay's, etc. But I am very unsophisticated where finance is concerned...I could really use the mattress-bank! Surprising article for you, Amanda, you are a woman of many sides...Bob x


VioletSun profile image

VioletSun 5 years ago from Oregon/ Name: Marie

I have actually been thinking of one day opening an account with a Credit Union, but don't know too much about it, except that they treat the customer with fairness, so your article was very informative and timely.

Excellent hub!


Shalini Kagal profile image

Shalini Kagal 5 years ago from India

I suppose the time for a financial revolution is here. I know that many Australians trust their credit unions more than any bank - and they feel they belong and get better service. Thus far, the banks have acted like they were doing us a favour by allowing us to park our money with them. Maybe this is their wake up call - will they see the signs and change? Maybe it's time the co-op movement spread to every facet of our lives!


Amanda Severn profile image

Amanda Severn 5 years ago from UK Author

Hi Lynda, I suspect that America is a lot further down the credit union route than we are here in the UK. Of the 49,000 credit unions worldwide, only 465 are in the UK, but this figure is growing fast as banks become increasingly unpopular. In Ireland credit unions are much more widely used than here, and I anticipate that we will eventually catch them up.

I haven't heard of any credit unions failing over here, but other savings schemes certainly have. As you say, it is important to check whether your savings will be covered by the governmment backed scheme before changing to a credit union.


Amanda Severn profile image

Amanda Severn 5 years ago from UK Author

Hi Bob, I have an account with the Nationwide too, but it's pretty much dormant these days. I do like the fact that it serves it's members and keeps costs down, and I think that all building societies were similar in that regard until they started to get big ideas about becoming banks!

I started getting interested in the idea of joining a credit union a while ago. I have friends and family in Ireland, and they are much more widely used over there. Recently I noticed that a small one had popped up in the main shopping street of our nearest town, and that was what kick-started this hub. I realised that credit unions are more than just a small way of socking it to the banks. They are also a means to help others in the immediate community, and that has to be a good thing.


Amanda Severn profile image

Amanda Severn 5 years ago from UK Author

Hi Marie, I don't know too much about credit unions in America, but I know that there are apparently over 90 million Americans using them, so they have to be pretty well established. I remember reading that people are far more likely to move house or change their life partner than they are to alter their bank account, but I'm working on the idea that if we think the banks are either corrupt, or greedy, or both, then we need to find alternatives.


Amanda Severn profile image

Amanda Severn 5 years ago from UK Author

Hi Shalini

'Thus far, the banks have acted like they were doing us a favour by allowing us to park our money with them'

Perfectly put! I'm interested in co-operatives of all types. If we all pull together we can make a difference. Sitting around and complaining gets us nowhere. Lone voices reedily muttering and moaning never get heard. It's only when we come together that change happens.


amillar profile image

amillar 5 years ago from Scotland, UK

Hi Amanda,

This is a very useful hub. I've been thinking about joining a credit union for a while, but for the reasons you've been discussing here in the comments, I'm still at the thinking stage.

I don't suppose anything is risk free. There might be a safety net now (the Financial Services Compensation Scheme, is it? - it used to be about £30,000, I think), but governments are there to legislate: they didn't like the trade unions, so they legislated; they wanted to deregulate the banks, so they legislated - and look what happened. Much of the legislation that leaves us vulnerable is put through The House like a dose of salts - before we know it, and manifestos mean nothing these days. George Osborne could just say, "We were left with such a mess; we shall now do what we like. (Which was what we intended to do anyway"). I'm paraphrasing, of course. How many times have we heard people say, "They can't do that"?

Anyway, this is a great hub, and it has me thinking again. I’m off to click on that link you put up.


Amanda Severn profile image

Amanda Severn 5 years ago from UK Author

Hi Amillar

I guess the FSC scheme is only likely to continue if affected borrowers never exceed the contigency fund. Apparently David Cameron has stated his support for credit unions in parliament fairly recently. So far so good! I wonder whether the credit unions will remain as popular with the government if they start making serious in-roads into the banks' core business. Let's hope so!

I hope your search for a local credit union was fruitful. I've signed up to mine, and am waiting to see how it prospers.


Hello, hello, profile image

Hello, hello, 5 years ago from London, UK

Thank you for a real eye opener.


Amanda Severn profile image

Amanda Severn 5 years ago from UK Author

Hi Hello,hello,

Thanks for stopping by and commenting.


SpotBanks profile image

SpotBanks 5 years ago from philadelphia pa

Nice article!


Sally's Trove profile image

Sally's Trove 5 years ago from Southeastern Pennsylvania

You touched on a hot issue. Credit unions and community-based banks base their business plans on the economics of their depositors, not on the resale value of their assets in the global market.

Philadelphia has a long history of community-based banking, where loans are made against the deposits of the community. These community-centered banks, once called savings and loan associations, who have kept to that business practice are doing very well. The community invests in the bank, and the bank invests in the community.

This is the same thinking for a credit union, where the investments go hand-in-hand with a common interest, most usually a community of investors (depositors) who share a common interest such as the company they work for.

The point is that local banks and credit unions, at least in the US, give the investor (depositor) the security of knowing that there's an investment in community: what's good for the goose is good for the gander.

It may be that "credit union" describes a different entity outside of the US, but I thought I'd add my perspective from here.


Amanda Severn profile image

Amanda Severn 5 years ago from UK Author

Hi Sally, your US credit unions sound very similar to those in the UK. We're a long way behind America in terms of getting a high profile for the credit unions. They are still few and far between in the UK, but with all the stories about bankers bonuses etc., there has been a sharp increase in interest in banking alternatives.

The great thing about the credit unions, as you mention in your comment, is that they provide an opportunity to invest in the local community (or in your church group, or trade union). We're living in a world where things are changing very rapidly, and I believe that people are returning more and more to community based lifestyles.


bbnix profile image

bbnix 5 years ago from Southern California

A wonderful, informative article, and I loved your empathetic perspective about helping communities and co-ops as opposed to stockholders and conglomerates with no local interests.


Amanda Severn profile image

Amanda Severn 5 years ago from UK Author

Hi bbnix, I'm a great believer in keeping things local wherever possible. On a community by community basis, Credit Unions make a lot of sense.


KoffeeKlatch Gals profile image

KoffeeKlatch Gals 5 years ago from Sunny Florida

Amanda, very well written, informative piece about credit unions. I have been with a credit union for a few years and I am very plased with it.


Amanda Severn profile image

Amanda Severn 5 years ago from UK Author

Hi KoffeKlatch Gals

I think there are a lot of delighted Credit Union customers out there. I'm glad your one of them! Thanks for stopping by and commenting.


Paraglider profile image

Paraglider 4 years ago from Kyle, Scotland

Hi Amanda - This was a very interesting read. Next time I'm back in UK I should look into the Worcester area for a credit union and maybe move some cash out of my bank. (Your writing style is highly readable, by the way. Smooth flowing :-)


Storytellersrus profile image

Storytellersrus 4 years ago from Stepping past clutter

Amanda, I was under the impression that you were no longer writing here! Happy to discover this is NOT the case. And I was happy to read this hub, because I am waiting until the right moment to transfer all my money to the local credit union in town. It is well-established and though Linda does not think US Credit Unions are as secure as Canadian ones, there are a few that are quite trustworthy. Truth be told, I don't have that much money, haha. So I have less to lose, I suppose. Thanks for all the information. I have been meaning to research this before I take the plunge. You have begun the process for me. Hope you are well!


Amanda Severn profile image

Amanda Severn 4 years ago from UK Author

Hi Paraglider, thank you for your kind comment! I just visited my own local Credit Union yesterday, and was delighted to learn that they are growing rapidly. I'm so glad they are there, as two new businesses have recently sprung up in the same stretch of shops. One is a payday loan company/pawnbroker, and the other offers household items to be bought on credit over extended periods. We need more Credit Unions, and fast!


Amanda Severn profile image

Amanda Severn 4 years ago from UK Author

Hi Barb, it's lovely to hear from you as always! You're right that I have been largely absent from HubPages of late. I've been pursuing other interests recently, and have only popped in occassionally to respond to comments. I hope you do go ahead with your move to a Credit Union. I believe that nothing will change in the larger corporate banks until they also start to feel the pain. The only way that will happen is if they begin to lose huge amounts of customers to more ethical businesses. I've been thinking this for some time, and since the 'Occupy.....' movement has taken hold, I've become even more convinced. I sympathise with the protests, but I strongly believe that the only way to change things is from the bottom up.


Storytellersrus profile image

Storytellersrus 4 years ago from Stepping past clutter

Bottoms up to you, Amanda! I toast your proposition and I as former activist will join your movement. Good one. Of course I have already voted it up and useful. Perhaps I will add awesome!


Amanda Severn profile image

Amanda Severn 4 years ago from UK Author

Cheers Barb!


Storytellersrus profile image

Storytellersrus 4 years ago from Stepping past clutter

I am linking this hub to my Chase bank hub. Prost!


Amanda Severn profile image

Amanda Severn 4 years ago from UK Author

Hi Barb, I've done a quick scan of your hubs, but can't immediately spot the Chase bank one. Would you leave a link here in the comments, so that I can return the favour? Thank you!!


Storytellersrus profile image

Storytellersrus 4 years ago from Stepping past clutter

Amanda, I am thinking your hub will do more good on my site than mine will do here, but I appreciate the invite! Here is the link: http://hubpages.com/money/An-open-letter-to-Jamie-...


GmaGoldie profile image

GmaGoldie 3 years ago from Madison, Wisconsin

In my first career of Finance, one of my goals was to start a credit union. I feel strongly a return to local financing is needed - worldwide. When I wrote my senior thesis in college I predicted the demise of the small bank and sadly the deregulations have gobbled up the locally run bank. A grass root effort to return to local financing is key for the survival in the United States and beyond. Thank you for a great hub.


Amanda Severn profile image

Amanda Severn 3 years ago from UK Author

Hi GmaGoldie, I completely agree that there needs to be more local financing, and I'm hoping that initiatives such as Credit Unions will increasingly become a feature of our High Streets. I have savings in our local CU and the interest rates are substantially higher than in my regular bank. Unfortunately the Credit Unions don't have the financial ability to produce big, swanky advertising campaigns such as those run by the banks and the money-lenders, so they mainly grow by word of mouth. It's a slow process, but eventually they will enjoy the recognition they deserve.

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