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Banks and credit unions, how do they compare?

Updated on September 27, 2014

Banks

Comparing financial institutions

In the confusing world of finance, there are a lot of mixed messages and some very tough competition vying for your dollars. One topic that comes up frequently is how to select a financial institution. It helps to know a few basic points as you are exploring the options that are available.

Some key questions that we will cover in this discussion are:

  • What financial institution will serve your particular needs the best?
  • How is your account insured?
  • Who is qualified to offer you the various financial services?

First of all, let’s review the basic difference between two types of financial institutions. In this example, we will examine banks versus credit unions. They both advertise for your business and offer a variety of services but how will you determine which fits your needs the best?

And in some cases, it may not be an either/or decision. You may find that having an account with both types of institutions may serve your needs for different reasons.

Credit Unions

Credit Unions are member-owned, not-for-profit financial cooperatives. The members are typically part of a group of employees or an organization that have a common bond. The members pool their savings and make loans to each other at interest rates that are frequently lower than bank rates.

The credit union is designed to serve its members and any profits generated will directly benefit the members.

Since credit unions are managed in the local community and they typically know their customers very well, that close relationship helps to process loans locally without the distance or delay of a national directive.

How is my credit union account protected?

In regard to account insurance, the National Credit Union Administration (NCUA) is the independent federal agency that charters and supervises federal credit unions throughout the United States and its territories.

NCUA oversees the National Credit Union Share Insurance Fund (NCUSIF). It is backed by the full faith and credit of the United States government. The NCUSIF insures the member accounts in all federal credit unions.

Banks

Banks are typically publicly traded financial institutions that are owned by their investors. And only investors get a share of the profits. Banks are profit making corporate entities that gain a profit primarily from the spread (or difference) between the interest rates that is offered on the deposits made versus the interest rate that is charged on loans that they make to the public. For example you may earn a .05 % interest rate as a reward for holding your savings balance in the bank account while you may pay a rate of 3-4% to the bank for borrowing on your car loan. In addition to the spread, there are also various bank fees that are collected.

Banks are open to the general public without membership or eligibility requirements but account holders have no voting privileges. Since banks have larger network of account holders and assets under management, there is typically a larger pool of capital available than with credit unions.

How is my bank account protected?

Banks are federally insured by FDIC- Federal Deposit Insurance Corporation. FDIC insurance covers all deposits on checking and savings accounts plus money market deposit accounts and certificates of deposit (CDs). The insurance standard is $250,000 coverage per depositor, per insured bank, for each account ownership type.

Other points to consider, banks are typically more adept at assisting you with international financial transactions such as currency exchanges or wiring funds to overseas accounts. Banks may also offer more diverse services than credit unions, such as brokerage service and trust services.

In summary:

Banks are publicly traded financial institutions that seek to make a profit for the investors and stockholders.

Credit unions are owned by its members with a primary purpose to benefit its members.


Who is qualified to offer financial guidance?

Many types of representatives are eager to help you and can provide a range of financial services.

From bank tellers to loan officers to stockbrokers, each person has an area of expertise and specific qualifications. Be sure to look at their title and education and ask about their years of experience. If you have a complex financial situation, a CFP, (certified financial planner), can provide guidance across many topics such as retirement planning, investments, managing debt, etc.

Next step:

  • Determine what financial services that you need: such as savings, loans and/or investments.
  • Compare the benefits and costs of the financial institutions (what are the current interest rates and what fees will they charge) plus what services are convenient for you.
  • Talk with the financial representatives regarding your expectations

Avoiding expenses:

  • Review your account statements to make sure that it is accurate and you have recorded all the activity
  • Be aware of account restrictions, such as how frequently you can withdraw, in order to avoid penalties
  • Keep track of your balance and transactions to avoid fees, such as overdrafts, bounced checks, ATM withdrawals.

The most important decision is what serves you and your family’s needs the best. And your needs may change and expand over your lifetime so your financial relationships need to grow with you.

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