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What's the Difference Between Banks and Credit Unions?

May 25, 202115 minute read

In the search for the best home for your money, you’ll come across banks and credit unions. The two may look quite similar from the outside, but the distinctions between them can make a world of difference for you and your financial needs, interests and goals. Understanding the characteristics that set banks and credit unions apart can help you make the best choice about where to keep your money and do your banking.

Before we get to those differences, let’s discuss the similarities between banks and credit unions. Both organizations typically offer standard financial products and services, including:

  • Checking and savings accounts (personal and business)
  • Direct deposit
  • Mobile banking
  • ATM access
  • Money market accounts
  • Home and auto loans
  • Small business loans
  • Certificates of deposit (CDs)/share certificates
  • Credit cards
  • Deposit protection up to $250,000

In addition, credit unions and banks make money the same basic way. They charge more interest on loans than they pay out on the accounts they offer, so they bring in money to pay their expenses and continue to operate. Now, let’s explore the differences between a bank and a credit union.

What is a bank?

A bank is a for-profit business that’s generally owned by shareholders or investors, and those people are interested in making money. They aren't invested in the financial institution to make friends or even to help a community. They're focused on their financial portfolios and interests.

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Nearly anyone can open an account at a bank and become a customer, and there aren't a lot of specific rules for qualification at most places. However, you could be denied due to past issues with a bank, such as bounced checks or any type of fraud that would cause the bank to consider you a serious risk.

Many banks are national and have branches all over the country where they can be used by anyone with an account. Other banks are local and have a much smaller number of branches based on a geographic area, such as a state or several states in one region.

What is a credit union?

A credit union is a not-for-profit organization that’s traditionally owned by its members. That means the people who open accounts there are both members and owners. That ownership structure gives members the chance to gain more value from the financial institution.

Credit union members typically vote on a volunteer board of directors. These directors essentially manage the credit union and help make decisions for the good of all credit union members. That’s why you’ll read a lot about how credit unions are “member-owned.”

There are rules and regulations governing who can join credit unions, and not everyone is eligible to open an account. For example, a teacher's credit union might be open to anyone employed at an education institution. Some credit unions restrict membership to those who live or work in a particular county or geographic area of the country.

Different types of credit unions abound. Even if you're not eligible to join a particular credit union, there's likely a credit union in your area you can qualify to be a part of.

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How do banks and credit unions differ?

Besides the ownership and profit status of banks and credit unions, there are some other important differences between the two types of financial institutions. It's vital to understand these differences in order to choose the right option for your savings, lending and other financial needs. Here are some of the most significant considerations when it comes to deciding whether to choose a bank or a credit union.


Both credit unions and banks charge fees. However, credit union fees tend to be lower than those a bank would charge. The reason is that, unlike banks, credit unions aren’t obligated to shareholders. As a result, the fees credit unions earn beyond their expenses are returned to members in the form of lower fees for services, lower interest rates on loans, and higher returns on savings accounts and investments.

Banks may also have more fees than credit unions, which could end up costing you more money in the long run. For example, while most credit unions offer free basic checking accounts, the average bank either charges a fee for that service or has a higher minimum balance requirement.

At either type of financial institution, some fees can be waived through certain actions, such as direct deposit, keeping a certain amount of money as a minimum balance or making monthly transfers to a savings account.

Interest rates

When looking for a financial institution that offers good interest rates, both banks and credit unions are worth considering. However, credit unions often charge lower interest rates on loans and offer higher dividends on savings and investment accounts. That’s good news for anyone who wants to save on the cost of a loan or who’s looking for a savings account with a better return.

Banks pay taxes that credit unions can avoid with their not-for-profit status, which means there are differences in the way the two financial institutions do business. Furthermore, the goal of banks to make money for shareholders is also a driver of higher interest rates and lower dividends.


One of the biggest concerns people have when opening a banking account or a credit union account is the safety of the funds within that account. The last thing you want is to see your hard-earned money vanish due to a computer glitch or another recession. That’s why banks and credit unions have insurance for all their accounts.

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Whether you take your business to a bank or a credit union, you enjoy the same amount of federally backed protection for the money in your account up to the insurance limit. If you have a checking account at your local branch of XYZ Big Bank, for example, those funds are insured up to $250,000 through the Federal Deposit Insurance Corp. (FDIC). Similarly, if you have a checking account at a local branch of MyTown Federal Credit Union, those funds are insured by the National Credit Union Administration (NCUA) up to $250,000.

This limit is per institution, per depositor. That means if you have a checking account and a savings account (or multiple savings accounts) with one bank or credit union, the total amount all accounts are insured for is $250,000. If your holdings exceed this limit, it’s best to spread them among multiple institutions or work with your financial advisor to come up with a broader safety net.

Customer Service

If a high level of customer service is important to you, you'll generally find that in spades at credit unions. Because of their community-based nature, these financial institutions tend to be more personal. They also have more flexibility in how they can resolve member issues. Additionally, members can influence customer service policies by exercising their voting rights within the credit union.

With big national banks, customer service policies are often set by board members or executives that likely have no connection to your local community. This leaves little flexibility in how rules are enforced, and customers have no say in how policies are decided.

Benefits of a bank

The right financial institution can help you manage your money wisely, help you expedite the savings process, and even automate transfers of funds into various savings and investment accounts. The benefits of banks come down to these key details:

  • Convenience. Some of the bigger national banks can be found almost anywhere, and many of them have large ATM networks. That means you don’t need to go out of your way to access your account, withdraw funds or manage more complex transactions.
  • Product offerings. Banks sometimes offer more products than credit unions. For some people, there’s little need for anything beyond what credit unions and banks both offer. However, if you need more extensive financial services, you should check to see whether your financial institution of choice offers the products or services you need.
  • No membership requirements. As long as you’re of age and have the appropriate documentation, practically anyone can open a bank account.

These are strong benefits to consider, despite the higher fees, lower dividends and limited customer service associated with banks. The truth is banks do have a lot to offer in the right circumstances and are the best choice for many people and businesses.

Benefits of a credit union

Credit unions are more customer- and community-oriented than banks. Rather than focusing on profits, credit unions favor money management education and financial literacy for their members. Other benefits of credit unions include:

  • Low interest rates. Credit unions generally offer lower interest rates on loans and higher returns on savings than banks do.
  • Greater community participation. Credit unions support communities with business loans, community partnerships, and sponsorships of school and various community initiatives. Credit unions are also more likely to offer community scholarships and grants, assist with fundraising efforts, and work to make your community a better place.
  • Customer service. Credit unions emphasize customer relationships and seek opportunities to educate customers about their financial options.
  • Focus on financial literacy. Credit unions want you to succeed, financially speaking, and offer many options to educate you about financial products and managing your finances.

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Although credit unions usually don’t have as wide of a presence on the national stage as big banks do, most credit unions are part of networks that offer “shared branches.” This means you can make deposits or withdrawals at credit unions that are part of the network even if they aren’t your “home” credit union. For more complex financial needs, you’ll still want to work with your local credit union

Should you choose a bank or credit union?

There’s not a perfect solution that fits the needs of everyone when it comes to financial institutions. You’ll have to decide for yourself if a bank or a credit union is the right choice for you.

The key is to measure each bank and credit union you’re considering on its own merits. Even among the different options available, you’ll find that some banks and credit unions are better than others.

You need to be confident your interests are being met, your money is safe, and your financial institution can meet your current and future financial needs. That isn’t to say it’s a lifetime commitment you’re making with your bank or credit union — only that building strong relationships with your financial institution of choice takes time.

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