What is the real difference between a bank and a credit union? I’ve banked at both, and really noticed no difference from where I stand. I put my money in, I get it back out, and if I leave it there for a while, it grows. In fact, I never really thought much about the difference until I saw a billboard near my home that posed the question (in three foot letters): “Why don’t credit unions pay taxes?” Well, why don’t they? And why, as the question implies, must banks pay them? In addition, now that I’ve moved to a different state, I’ve noticed something else: I can walk into pretty much any credit union and deal with them as if they were my own, even depositing money there that is then credited to my own account. For some reason, I can’t envision banks cooperating in this fashion. What gives?
A bank is a for-profit corporation owned by shareholders. They use the depositors’ money to make loans and other investments, and give some money back to the depositors in the form of interest. Some other money is given to the shareholders in the form of dividends, and the rest is reinvested in the business.
A credit union, on the other hand, is owned by the depositors themselves. Every time you deposit money, you’re “buying” a larger share of the credit union. All the revenue from loans is then distributed to the depositors as interest, since they are the shareholders. For this reason, credit unions are usually able to offer higher savings rates than banks. They can also offer lower loan rates because they don’t have to pay dividends.
The main difference between banks and credit unions is ownership.
Banks are owned by investors (either as a privately held corporation or a publicly traded stock) and are expected to make a profit.
Credit unions are owned by the members of the credit union. Each dollar in your savings account represents a share of the CU. Originally credit unions were created by (for example) employees of a company pooling their money to help out others who needed loans at a low rate of interest.
Generally, credit unions are more “user-friendly” and have lower interest rates, fees, etc. than banks (but not always).
The arrangement you have seen where one credit union will handle transactions for another is known as a “Credit Union Service Center” where a group of CUs form an association and agree to handle each others’ transactions. This is not the case everywhere.
The “banks vs. credit unions” issue is a hot one in some places, like Utah, where state credit union charters allow the “field of membership” rules to be fairly lax. Credit unions are limited by their charter as to who can be a member. Originally, this was restricted to employees of a certain company, or a specific industry, etc. In Utah, that restriction was expanded to allow any residents of a county where the credit union had a branch to become members.
This resulted in a handful of CUs which had offices in multiple counties to expand and basically compete with the banks on their own turf, while retaining the tax benefits of credit unions. Each year in the legislature the banks try to get laws passed to tax these large CUs (hence billboards like the one you saw).
You banked at both a credit union and a bank and noticed no difference? You must have gone to a crappy credit union or a great bank. Basically what everyone else said about the structure and such, but the big difference to everyday members is fees. I’ve never had a fee in my life at my credit union, where as my roommates who use banks get monthly fees up the wazoo. I could never use a bank after using a credit union.
I was living in Utah at the time I saw the sniping billboard in question. I now live in Texas and still belong to my Utah CU because they’re so freaking cool.
Credit union member, here. Been one since I was a kid when my mom opened an account in my name at her credit union. From what I’ve seen, there are few, if any, banks I’d use instead of my credit union. (However, I’ve seen other credit unions that I didn’t like much, for instance, I don’t use the one available here at work. Mine is pretty large and has much better bennies than some.)
On the tax question - I believe it’s (at least partly) because the credit union is nonprofit that it doesn’t have to pay taxes. The credit union itself doesn’t have anything to tax. As a shareholder, I do have to pay taxes on my dividends (the “interest” received on my account).
As far as I’ve seen, credit unions tend to have better services for a lower cost, because they’re not trying to make a profit. (Most CU members aren’t making enough in dividends to have much interest in increasing the profits - we’d just lose out on services and/or fees.) Banks and S&Ls resent this because CUs cut into their profits, so they keep trying to have the laws changed to penalize credit unions.
My CU originally was only open to employees from certain (large) companies. Quite some years back, they opened to almost anyone (had a whole list of qualifying circumstances, such as graduating from high school in this state). There was some sort of challenge from the banking industry, and they went back to the short list (although anyone who had joined meantime was allowed to stay). The CU appealed and ended up winning, and it’s again possible for almost anyone to join. The CU has increased greatly in size and benefits along with the increase in membership. (As opposed to most banks, where bigger usually means you get less, as far as I’ve seen.) I’m not sure what the specific legal antics were, but I guess that a lot of the laws must be on the state level.
Not always. In New York State and elsewhere, there are Savings Banks (also called mutal savings banks or Savings and Loan Associations in other states), which are owned by the depositors (much like a credit union), but which are open to anyone who wishes to open an account. No stock exists and dividends are not paid (other than interest on deposits).
Savings Banks used to be limited in what they can do (mortgages, but not commercial loans), though those limits are slowly being removed. Back in the 60s, they were allowed to pay an additional quarter point in interest, but could only allow savings accounts, not checking accounts.
There are banks of this nature across the country, though they are slowly switching away from the structure to a corporation. Anyone who has an account gets first crack at the IPO. Many financial wolves open small accounts in these banks on the chance that they will go public and they can get in on the ground floor.
New York has Savings Banks, Commercial Banks, and Credit Unions, with different regs for each.
As a concrete, specific example, today I had to obtain one cashier’s cheque from my credit union and one cashier’s cheque from my bank, in both cases based on deposited funds in my accounts with those respective institutions. The credit union issued me a cashier’s cheque without any fee, but the bank charged me $8.
Eight dollars, for what exactly? It doesn’t cost them any more to issue a cashier’s cheque than it does to dispense the same amount in cash. Okay, so there’s a minuscule cost for paper and ink and electricity to print the cheque. Nowhere near $8.
In order to get fee-free casher’s cheques at the bank, I would have to be a holder of a “premium account.” I don’t know the details, but I suspect that a premium account requires a minimum balance and/or a monthly fee of some kind.
We have credit unions over here too, but they are miniscule compared to banks. They do not offer anything like the services a bank can, like standing orders, direct debits, online banking etc. We also have building societies, which are much more like the American credit unions. They are owned by the members and were originally local to a small area and concentrated on savings and loans. These days they offer a wider range of services, but not as wide as a bank. The names of building societies: Bradford and Bingley, Coventry, Leeds etc still reflect their local roots.
All banks in this country offer free current accounts. They try hard to sell fee paying accounts by offering extra services like travel insurance, AA membership and free overdrafts (up to a limit).
The main, original ING is just a regular international banking conglomerate. It acquired some online banks like Netbank a while back. These are “regular” banks but without any physical branches. ING sold its US online bank, ING Direct, to CapitalOne a while back, but keeps online banks in many other countries.
All are standard, commercial, for-profit, stockholder-owned, entities.
I used to belong to a credit union. It was nice, and paid good interest, but when I moved I found that there were no credit union service centers that are convenient for me to go to. That’s the big problem with credit unions: small presence compared to what a large bank can offer.
So I switched to the bank that has the largest presence in my area. The interest is a joke, but there are plenty of ATMs I can use fee-free. And I can transfer money online without having to make a trip to the bank, which AFAIK I couldn’t do at my credit union.
It doesn’t exist any more. It was bought by CapitalOne a few months ago.
ETA: Let me rephrase that. Whatever part of ING I was dealing with was sold to CapitalOne, and my ING account became a CapitalOne360 account. It’s possible that some other parts of ING were not sold.
That used to be true, but my credit union has charged lots of fees for a very long time. I can avoid all of them by never doing anything stupid or making a mistake, but believe me they exist.
There’s a somewhat similar difference between some investment and insurance companies as between banks and credit unions. Vanguard for example (a mutual fund and brokerage co) is mutually owned by the investors. So is Nationwide Insurance (as their TV commercials hasten to point out). In some cases cutting out the profit really is a ‘free lunch’ for customer/owners. Vanguard is compared to most other mutual fund/brokerage co’s, especially if you basically believe in low cost index funds as the best way to invest.
I have a 5yr CD at Pentagon Federal CU. They were offering rates way above anyone else’s (they’ve since lowered them to just very good, relative to today’s generally low rates). And they just go through the motions of limiting their customer/owners to the military and Defense Department civilian employees as originally chartered. Their website offers various options to join different military support or interest groups for nominal dues and become effectively ‘part of the DoD’ as far as PenFed is concerned.
For one’s basic bank though it somewhat depends what you are looking for, IMO. The big banks have more products and services, as long as you’re careful about not getting ripped off by them for products and services where they stink. There isn’t a credit union conveniently located for banking stuff I need to do in person, which for me there still is. That’s another aspect that varies.
That sentence touces on the real difference - how each institution is chartered. All banks, savings banks (S&L’s) and credit unions are chartered as a state or national institution. The state vs. national charter indicates where the institution can do business and what government department has oversight. Federally chartered institutions are overseen by the Federal Reserve Board, FDIC and OCC. State chartered institutions are generally overseen by some combination of the above (depending on other factors) and are subject to state regulators.
Further, the charter must specify whether the institution will operate as a bank, savings bank or credit union. Each type of charter has different “can do’s” and “can’t do’s”, different regulations, different reserve requirements, different lending caps and different tax structures.
Each was designed to meet a specific need. Originally, credit unions were designed to meet a niche market where banks were not necessarily a good option. They were only allowed to take customers from that prescribed niche market. In return, they were given lower reserve requirements and certain tax breaks. Over time, regulatory gaps between the institution types have been reduced without changing the tax structures. IOW, credit unions today can act much more like a bank, but still don’t pay taxes - hence the friction.
I used to bank with those thieving bastards Bank Of America. Then I was invited to join a local Credit Union and have never looked back. My Credit Union is part of a CO-OP Shared Branch network with 6000+ locations. I can walk into any 7-11 and use the ATM for No Fee.
I banked at banks for years and then decided to Move My Money. Best financial decision I’ve ever made and so far, I haven’t run into many disadvantages. I can think of one offhand, which I’ll get to. But I still have online banking and online bill pay. Now I even have a smart phone app and the only thing it can’t do (but this is coming, I understand) is scan a check and deposit it for me. I still have to drive to the ATM. As far as ATMs go, my CU is partnered with the other ones in town, but the ATMs are all on the same networks as the bank cards. I’ve discovered the ATM at my grocery store is fee-free with my CU card – my old bank card cost me a buck or two to use the same machine. I get better rates on savings and I got a way better refinance deal for my mortage. Also got a great rate on my car loan. And I haven’t paid a fee since I switched.
Two disadvantages: For some reason that wasn’t explained to me, the CU does not do escrow accounts, so I have to handle the taxes and insurance on my mortgage myself, which is not actually a big deal at all – I just set aside a certain amount each month meant to pay those bills when they come due each year. It may be because the kid (seriously, I wasn’t even sure if he was legal to drink) who set it up did so as a HELOC so it may not be a straight mortgage.
The CU also doesn’t do brokerage services, so I could have flipped my IRA over there, but I would have had to sell the stock in my IRA. They would only offer like mutual funds or something in the IRA; there was no choice of investments at all. Because they are not a brokerage. So I had to leave my IRA with the Big Banks (I like index funds) and pray they don’t squander it with another market crash or something. I’m less comfortable with than than with the DIY escrow.