credit unions vs banks

[Jellymint]

I know that credit unions are like banks; they accept deposits, make loans and provide a wide array of other financial services. But what makes it different from a bank? What are the benefits and which is better?

[kork13]

Credit unions are, by definition, non-profit organizations. As such, they return their profits to the credit union's owners--the very members that they serve. What that means is that a credit union can offer loans & interest rates that are more advantages to the members than they would otherwise be able to offer if they credit union was seeking profits.

However, that doesn't necessarily mean that a credit union will always be able to give lower loan rates & higher account interest rates. It depends on the size & stability of the credit union, and the costs they incur while doing business.

Overly simplistic example:
Take two functionally identical, financially stable institutions (1 bank & 1 CU) with 100k customers/members each, and $10M in annual revenues. They are both able to offer a mortgage to you at 3.5%. End of year, each institution earns $1M in profits. The bank takes the $1M, says "sweet", the bank employees get a nice bonus at the end of the year, and the bank continues offering 3.5% mortgages. The CU takes the $1M, says "sweet", and starts offering mortgages at 3.25%.

So why are CU's not always the best answer? Large banks are able to compete with a CU's better rates due to economies of scale. A large bank and a small CU might both be able to offer that 3.25% mortgage, because the large bank's costs per dollar of revenue is lower than the small CU, and they earn enough profits to offset the reduced revenue from offering competitive rates. The CU can do it just because that's what they do. But as demonstrated, a small bank typically cannot compete with a small CU effectively.

I like credit unions. But I also appreciate the benefit of using a large bank. I use 2 banks and 1 CU, and like them all.

[AJSimon]

I know that credit unions are like banks; they accept deposits, make loans and provide a wide array of other financial services. But what makes it different from a bank? What are the benefits and which is better?

I've only ever kept my money in an account at my credit union, but it feels like banks really enjoy charging fees to their customers for things like not maintaining a minimum balance. I've had my CU account for 20 years and have never had to deal with stuff like that.

In my experience, credit unions also generally have prerequisites for membership - while you can walk into pretty much any bank and open up an account. Twenty years ago, my mother worked for the New York State Credit Union League, so I (being her son) was eligible for an account at my current credit union.

One theory I have is that, because CUs keep their membership rolls relatively low, you're less likely to become a number to them - you can hope for getting better service.

[commoncentsmike]

Credit unions are, by definition, non-profit organizations. As such, they return their profits to the credit union's owners--the very members that they serve. What that means is that a credit union can offer loans & interest rates that are more advantages to the members than they would otherwise be able to offer if they credit union was seeking profits.

However, that doesn't necessarily mean that a credit union will always be able to give lower loan rates & higher account interest rates. It depends on the size & stability of the credit union, and the costs they incur while doing business.

Overly simplistic example:
Take two functionally identical, financially stable institutions (1 bank & 1 CU) with 100k customers/members each, and $10M in annual revenues. They are both able to offer a mortgage to you at 3.5%. End of year, each institution earns $1M in profits. The bank takes the $1M, says "sweet", the bank employees get a nice bonus at the end of the year, and the bank continues offering 3.5% mortgages. The CU takes the $1M, says "sweet", and starts offering mortgages at 3.25%.

So why are CU's not always the best answer? Large banks are able to compete with a CU's better rates due to economies of scale. A large bank and a small CU might both be able to offer that 3.25% mortgage, because the large bank's costs per dollar of revenue is lower than the small CU, and they earn enough profits to offset the reduced revenue from offering competitive rates. The CU can do it just because that's what they do. But as demonstrated, a small bank typically cannot compete with a small CU effectively.

I like credit unions. But I also appreciate the benefit of using a large bank. I use 2 banks and 1 CU, and like them all.

Well said. I worked at a top 3 CU in Texas and I do most all of my business with them. I'm biased, but I do think they take care of their "members" more than traditional big banks do, but that doesn't mean larger financial institutions can't help with certain needs. For instance, if I ever needed a car loan (never will get another one, just saying) I would go to my CU as the rates are much better. However when I'm looking for a travel rewards credit card, more than likely my CU is not going to be the best bet.

For the most part, because CU's are not for profit organizations and are not held hostage by stock shareholder obligations, most average Americans would benefit by "banking" with credit unions.

[Kaoru]

great points - just some more thoughts,
CU aren't necessarily cheaper, as a non-profit, they are run often times like a non-profit, meaning the drive for profit (or cost cutting) aren't all there. as such, not only do you not have the economy of scale, you actually have large inefficiencies.

basically, identify your needs, find the institution that has
1. the best price for your needs
2. insurance to cover your deposit

On 2, if your deposit is larger than what the insurance covers - I'd recommend spreading your money across multiple institutions, just as a risk saving mitigation measure, amongst other good practices.

[GrimJack]

Like another poster, I choose credit unions because, as a non-profit, they are not fee-crazy. If I screw something up and get charged a fee, I can sometimes talk them out of it. I used to know the tellers and whatever you call those people sitting at desks by name.

Most banks and CUs have a notary that will notarize for free if you are a client - it is good to know.