Credit Unions vs. Banks: Key Differences Explained

Credit unions play an important role in the financial system. Like banks, credit unions typically offer checking, savings and loan accounts to customers. Unlike banks, credit unions typically focus on customers in a local community or with a common affiliation, such as those who work for a particular employer or are members of a nonprofit organization. So, what is a credit union? Here's a closer look to see if a credit union might fit your financial needs.

Brief History of Credit Unions

The first credit union in the United States opened in 1909. The first federally chartered credit unions came about in the 1930s, and the National Credit Union Administration (NCUA), the primary government oversight and insurance provider for credit unions, officially launched in 1970.

Today, over 4,500 credit unions operate nationwide with over $2.3 trillion in federally insured assets. They're commonly used by small businesses and households looking for personalized service and a single financial provider for all their accounts. It's also important to note that credit unions are not-for-profit organizations.

Credit Unions vs. Banks: What's the Difference?

Membership

Credit unions require membership, typically based on factors like where you live or worship, or your employment with a supported company or industry. Many credit unions allow anyone to join with a small donation to a partner nonprofit organization. Retaining membership usually requires having a savings account with a specific minimum balance.

That's different from banks, which are generally open to any customer. For example, Synchrony, an online bank, has no minimum balance requirements for its savings accounts or geographic limitations for customers in the United States. However, some local or regional banks may have geographic restrictions.

Ownership

A key distinction between the two is ownership: Credit unions are owned by their members, while banks are either privately owned or publicly traded. Each credit union member has the right to vote for the board of directors who oversee the credit union. In contrast, bank customers don't have this type of ownership or voting rights.

Fees and services

Fees and services can vary widely at both banks and credit unions. Both typically offer products like checking accounts, savings accounts, credit cards, mortgages, auto loans and personal loans. While credit unions often offer lower fees and more favorable rates than traditional brick-and-mortar banks, online-only banks tend to feature competitive rates and lower fees compared to many credit unions.

READ MORE: 5 Biggest Benefits of Online Banking

Pros and Cons of Credit Unions

Pros

Some potential benefits of credit unions may include:

• Lower fees and rates: Credit unions typically offer lower fees and better interest rates compared to traditional banks. Since they operate as nonprofit organizations, they pass their savings on to members rather than aiming for profit.
• Personalized service: Large banks often offer a standardized range of products and services. In contrast, credit unions tend to focus more on building personal relationships with members, potentially providing more customized account options and services.
• Community involvement: Credit unions are often locally based and highly involved in their communities. They may support local initiatives, charities and events. While some banks also support local organizations, including museums, chambers of commerce and youth programs, credit unions' community engagement tends to be more region-specific.
• Profit sharing: Some credit unions may return profits to their members in the form of dividends or other benefits when financial performance allows. This depends on the credit union's policies and leadership.

Cons

While credit unions offer several advantages over traditional banks, they also have certain limitations:

• Limited accessibility: Credit unions are often regionally based, and their physical branches and ATM networks may be less extensive than those of larger banks. While many offer online banking, smaller credit unions may not provide the same level of nationwide or international service.
• Smaller range of products: Credit unions generally offer fewer financial products than larger banks, with less variety in account types, investment options and credit card rewards programs.
• Technology limitations: Due to smaller technology budgets, some credit unions may offer fewer online and mobile banking features than big banks. As a result, their digital platforms can be less sophisticated or user-friendly.
• Membership requirements: You must join a credit union and become a member to use its accounts—and not everyone qualifies. To join a credit union, you may need to meet specific membership criteria, such as living in a certain area or working for a particular employer. Additionally, many credit unions require maintaining a minimum balance to retain membership.
• Lower credit card and loan limits: Credit unions, particularly smaller ones, may have fewer financial resources than large banks, resulting in lower credit card and loan limits for their members.
• Potentially slower decision-making: Credit unions, especially those that are smaller or more community-focused, may not invest as heavily in automation or quick decision-making processes, leading to slower approvals for loans or other services.
• Less global reach: Many banks operate on a national or international scale and offer services that cater to customers abroad. In contrast, credit unions typically focus on local or regional communities and may not provide the same level of support for international banking.

Different Types of Credit Unions

Credit unions often focus on specific types of members, depending on different criteria.

Community credit unions

Community credit unions are designed for businesses and households in a specific area, such as certain zip codes, cities or counties. They may extend to those who live, work or worship there. This inclusivity fosters a strong connection to local communities.

Employer-based credit unions

Employer-based credit unions are available to employees of a particular company or organization. Membership may also extend to workers' household or family members. These credit unions are commonly offered to employees of large corporations, government agencies or public institutions. Examples include credit unions for airline employees, manufacturing workers or military personnel and their families.

Trade or industry credit unions

These types of credit unions serve people working in a common field, such as healthcare workers, teachers or utility employees. With a trade-focused credit union, you may find more specialized products designed for the needs of someone with a certain career.

Credit Union Membership Eligibility

You may be able to walk into a local credit union branch and join, but that's not always the case. Here's a look at common membership requirements for credit unions.

Common membership requirements

Credit unions differ from banks because they require membership based on specific eligibility criteria. These criteria can include living, working or worshipping in a designated community, being employed by a particular company or being part of a specific industry or profession. Some credit unions also cater to alumni associations or labor unions, so be sure to check each institution's specific guidelines to determine if you qualify for membership.

Family membership

Many credit unions allow family members of existing members to join, even if they don't meet the primary eligibility criteria. This can include spouses, children, siblings, and sometimes even extended family members, such as parents and grandparents. Family membership policies can vary between credit unions, so it's worth asking if your relatives are eligible to join through your membership.

How To Join a Credit Union

Once you confirm your eligibility, most credit unions require an opening deposit—often between $5 and $25—to open a savings account that establishes your membership. You'll need to fill out an application and provide identification, and you may have to supply proof of eligibility. Many credit unions also offer online membership applications.

Not Sure if a Credit Union Is Right for You?

Credit unions are a good choice for many small businesses and individuals, but they aren't perfect for everyone. If you're looking for an online bank where you can earn top-tier interest rates with low fees, an online bank like Synchrony could be a better choice. Or you may want to take advantage of the best of both, with a local credit union for cash transactions and an online high yield savings account to maximize your earning potential.

Learn about our online high yield savings accounts here.

READ MORE: What is FDIC Insurance? How it Works and Insurance Limits