Friday, January 30, 2015

Critical Differences Between a Bank and a Credit Union

Banks and credit unions both offer the same loan and financial products to borrowers and clients, but there are critical differences between each type of institution. If you are trying to decide where to open an account or where you should apply for a loan, understanding these critical differences is an absolute must. While some people will use terms like bank, savings institution and credit union interchangeably, here are the distinct differences all prospective clients should be aware of.

How Your Money is Used by a Bank

From the outside looking in, credit unions and banks are one and the same, but when you scratch the surface and learn about the operations, you will find that the two are extremely different. When you open an account with a bank, the money that is deposited will be used to invest and earn profits for that institution. This is why there are minimum balances for accounts or else you will be charged a fee. 

How Your Money is Used by a Credit Union

With a credit union, which is not a for-profit organization, you become a shareholder when you deposit money into your account. The dollars in the account are actually buying shares, and you are part owner of that company. Credit unions like PenFinancial Credit Union are not corporate entities and you, along with other members, have a say in how the company is run. Because members have an interest in how the company performs, they tend to take more pride in being a customer and a shareholder when doing business with a credit union rather than a bank.

The Presence of Banks vs. Credit Unions

Another thing that sets a credit union apart from a bank is its presence. Typically, banks have a nationwide presence, which creates the need for large advertising and marketing expenditures. Banks are also known to participate in lobbying efforts with the government to fight for new legislation that will help grow their profit margin. Their goal is to be on top, above competition in the industry.

The presence of a credit union is very different. Most of the time, only people with certain employers or in a specific community are able to become members. Because there is exclusivity, the credit union does not need to advertise. They partner with organizations and offer their products in a way that is spread through word of mouth. Being not-for-profit means that any profits are reinvested into the company to offer lower interest rates and better products. 

The Balance Between Customer Care and the Interest of the Institution

Credit unions want you to feel like part of the community. After all, you are part owner and deserve to receive the best customer care. While offering competitive products and services is important, these institutions have made a commitment to take build relationships and exceed their members' expectations.

Banks have to find a good balance between their motives to earn profits and the cost to provide customer care. All activities that the bank has should result in profits, and this can affect your bottom line. Banks are also allowed to use your deposit funds on a multitude of potentially risky investment options designed to increase the profits of their shareholders. These actions show where their loyalties truly lie.

As you can see, there are critical differences in the interests of a bank versus the interests of a credit union. Ultimately, you will need to decide if you want to be a depositor funding the profits of a bank or a shareholder of a credit union providing excellent rates and customer care.

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