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.

5 Ways to Earn More Interest on Your Savings

Interest Rates (Photo credit: 401(K) 2013)

If you are someone who is committed to having a solid savings account, then there's a pretty good chance that you've taken the financial advice of top experts like Suze Orman, Dave Ramsey and Warren Buffett and put some money aside each month for your savings account. And if that's the case, we think that is simply awesome. But have you ever wondered what you can do in order to earn more interest on the hundreds (or thousands) of dollars that you have inside of it?

If you've been looking for ways to earn more interest on your savings, we have provided you with five of them below:

Look for the best interest rate. There are a lot of people who never consider changing banks simply because they have been with the same financial institution for many years. But if you really want to get more interest on your savings, we recommend you shopping around until you find one that has the highest rating. Although some of the larger banks do not have the best rates, many community banks and credit unions do. Just make sure that whatever institution you choose is insured by the Federal Deposit Insurance Corp. or the National Credit Union Administration.

See what incentives that you have to offer. Once you find a financial institution that you are interested in, the next thing that you should do is look for the kinds of incentives that they have to offer. For instance, there are banks that offer a modest monetary amount for opening up a new account and there are plenty of credit unions and internet banks that give bonuses for opening a new checking account with them as well.

Inquire about low-penalty certificates of deposit. Although low-penalty certificates of deposit are basically like "liquid money", one of the reasons why they appeal to many individuals is because they pay higher rates. With them, not only are you able to take money out at any time without a penalty, but you can earn a higher interest rate than a savings account. Plus, it comes with FDIC insurance.

Don't overlook your savings bonds. Something that you might want to speak with a company like DepositAccounts.com about is purchasing a few savings bonds. Although most of us can recall getting them from our grandparents while growing up as children, aside of it being a nostalgic gift, you might be surprise by the interest rating that comes along with them. In fact, a Series I savings bond can currently earn you as much as 1.76 percent. That's a pretty impressive amount.

Open up a money market account. If you're really serious about growing your savings account, something that you can do is open up a money market account. It's basically the same thing as having a savings account. The only difference is that in most cases, you have to have a minimum balance (sometimes as much as $2,500) and you're only allowed to make a withdrawal 3-6 times per month. But the benefit is that you are usually offered a much higher interest rate. For more information on money market accounts, visit your local bank institution.

3 Reasons a Credit Union May Be a Smart Financial Decision for Your Family

Credit Unions Vs Banks

Although they may seem similar in many respects, banks and credit unions are definitely different. Although credit unions have most or all of the convenience of banks, they also have advantages that banks to not have. For instance, credit unions are often more flexible about approving loans than banks are. Credit unions also frequently have a “down home” feel – tellers and bank officers may greet you by name whenever you visit.

While banks are commercial institutions, credit unions are nonprofit organizations. Most credit unions belong to the National Credit Union Association, or NCUA. While you must be a member of a credit union to open an account, credit union eligibility is often easier to achieve than you think. Churches, companies and even cities have organized credit unions for their members, employees or residents. As a result, the odds are good that you are eligible to join at least one credit union in your area. Depending on your circumstances, opening a credit union checking account may make sense. 

A Stakeholder, Not a Customer

As a member of a credit union, you are a stakeholder in the organization, and not just a customer. Your account represents an ownership interest in the organization. Because credit unions are nonprofit organizations, they often have programs in place to assist their members financially.

For example, many credit unions offer short-term loans to represent alternatives to costly payday loans. Payday loans are often due within one or two weeks and feature interest rates exceeding 300 percent. By contrast, short-term loans offered through credit unions have longer repayment periods, and carry much lower interest rates.

Credit Card and Other Banking Conveniences

Deposits made to a credit union are insured by the NCUA, just like deposits made to banks are insured by the Federal Deposit Insurance Corporation, or FDIC. This means that your money is safe. In addition, many credit unions offer Certificates of Deposit and other investment instruments that carry competitive earning rates.

As a member of a credit union, you can open checking and savings accounts, much as you can with regular banks. If you are a business owner, you can often open business checking and savings accounts through your credit union. You an also obtain personal and business credit cards from a credit union. Credit unions also often offer lower interest rates on credit cards and loans for individuals and businesses than banks

Extensive Free ATM Networks

If you hate ATM fees, joining a credit union is definitely a smart move. Many credit unions belong to nationwide networks that offer free access to ATMs for their members. You can deposit, withdraw and transfer money for no fee at any one of the ATMs that operate within the bank’s network. In addition, if you frequently travel abroad, you may be pleasantly surprised to learn that the debit or credit card issued by your credit union carries no foreign transaction fees. This feature alone can translate into significant savings if you use your card to pay for your hotel or for a car rental.

Charles Talley is a credit union branch manager. He loves to write about the benefits of this type of financial account on personal finance blogs.