Banking Basics

How to Choose Between a Credit Union or Online Bank

At first glance, a credit union might seem just like a bank, but there are some fundamental differences between a credit union and a bank. Learn what a credit union is, how they operate, and what differentiates credit unions from traditional and online banks.

Katana Dumont • November 22, 2021

Nowadays you have a lot of options when it comes to choosing a financial institution to help you manage and store your money. In addition to a traditional bank, you also have two other notable alternatives: credit unions and online banks. Both are steadily growing in popularity, and it’s not hard to see why. Credit unions and online banks both tout enhanced customer service, lower fees, and other perks that you won’t find at your average big bank.

Choosing where you should store your hard-earned cash is not a decision that should be taken lightly. Although both banks and credit unions have similar offerings, there are some important distinctions between these two types of institutions. Read on to learn more about how credit unions, traditional banks, and online banks differ.

In This Article

  1. What Is a Credit Union?
  2. How Do Credit Unions Work?
  3. Differences Between Credit Unions and Banks
  4. Credit Union vs. Traditional Bank vs. Online Bank
  5. What to Consider When Choosing Between a Traditional Bank, Credit Union, or Online Bank
  6. FAQs
  7. Final Thoughts

What Is a Credit Union?

A credit union is a non-profit organization owned by the members of a particular community. It might be residents of a specific region, members of a certain faith, employees of a particular business, or other groups. They’re similar to a traditional bank, but membership is required to join, and they’re often smaller in scale and have fewer in-person locations. 

Credit union members can access the same kinds of products and services as offered by a traditional bank, such as credit cards, checking and savings accounts, and loans. But credit unions usually have lower fees and higher interest rates compared to traditional banks.

How Do Credit Unions Work?

Credit unions aim to serve members by offering competitive products with better rates and fees than you would normally see with a for-profit traditional bank. Like banks, credit unions charge interest and account fees, but they reinvest those profits and use them to help members. Examples include low-interest loans and other financial services, whereas banks give these profits to their shareholders.

Since a credit union is owned by members, you’ll need to meet eligibility requirements in order to open an account. The eligibility requirements differ across credit unions.

Eligibility Requirements

Each credit union has its own requirements, but in general here are some of the ways you can become a member of a credit union.

You may qualify if:

  • You live in a certain area or work with an eligible employer 
  • You’re affiliated with a participating organization, such as a labor union or school 
  • You have a family member who is already a member of a particular credit union

In addition to meeting eligibility requirements, you may be required to pay a one-time membership fee and open an account with a small deposit.

Differences Between Credit Unions and Banks

Now that you know what a credit union is and how they operate, let’s explore how credit unions and banks differ.

Ownership

Banks: Banks are for-profit organizations owned and run by shareholders. The main goal of banks is to maximize profits for their shareholders.

Credit Unions: Credit unions are not-for-profit and are owned by their members.The primary goal of credit unions is to promote the financial welfare of their members and to return profits to them.

Membership

Banks: Anyone is eligible to open an account with a bank including individuals or companies. 

Credit Unions: You must be eligible to become a member. Some credit unions are very restrictive about who can join, while others are open to anyone willing to pay a membership fee.

Products and Services

Banks: Banks offer both personal and commercial banking products, including business credit cards and business loans. Banks may offer investment and saving accounts like individual retirement accounts (IRAs), certificates of deposit, and money marketing accounts.

Credit Unions: Credit unions tend to offer fewer products than banks, especially when it comes to commercial banking products, like commercial loans. Credit unions also typically offer fewer investment products limited to checking and savings accounts and credit cards.

Rates and Fees

Banks: Banks typically have higher interest rates on loans and lower interest rates on deposit and savings accounts. Traditional banks also tend to have more and higher fees on accounts and services than credit unions.

Credit Unions: Credit unions typically offer low or no-fee checking and savings accounts and services. And they tend to have the lowest interest rates on loans. As for interest rates on savings products, you’re likely to find that credit unions offer higher rates than banks. 

Deposit Insurance

Banks: Banks are insured by the Federal Deposit Insurance Corporation (FDIC), which provides deposit insurance for up to $250,000 per depositor, per account.

Credit Unions: Credit unions are insured by the National Credit Union Administration (NCUA). Like FDIC insurance, NCUA insurance guarantees up to $250,000 per person, per account.

Credit Union vs. Traditional Bank vs. Online Bank

While an online bank shares many of the same features as a traditional bank, there are some key differences that make online banks stand out. In order to understand the full breadth of how credit unions differ from banks, we have to look at banks within two distinct lenses: traditional banks and online banks.

Keep in mind that some financial institutions might differ, but the following table provides a general comparison of credit unions, online banks, and traditional banks.

AspectsCredit UnionTraditional BankOnline Bank
Profit statusNot-for-profitFor-profitFor-profit
Branch networkUsually only a handful of branches in a limited areaLarge, sometimes national brick-and-mortar branches availableNo physical locations
Interest ratesHigher rates on deposit and savings accounts; lower rates on loansHigher rates on loans; lower rates on deposit accountsHigher rates on savings accounts and sometimes on checking accounts
FeesLower account feesHigher fees and more additional feesLower fees or no fees
Deposit insuranceNCUA insuredFDIC insuredFDIC insured
OwnershipOwned by members Owned by shareholders & investorsOwned by shareholders & investors
Online accessibility and tech servicesMore limitedOffers the basicsWide variety

What to Consider When Choosing Between a Traditional Bank, Credit Union, or Online Bank

Before choosing one financial institution over the other, ask yourself the following questions:

  • How many branches and ATMs do they have? If in-person service matters to you, look at banks and credit unions that have local branches. If you’re just looking for a way to deposit and take out cash, many online banks offer their customers access to a broad network of ATMS. 
  • What interest rates do they offer? Check out the interest rates on whatever accounts you’re considering from different traditional banks, online banks, and credit unions. You are most likely to find the best rates with credit unions and online banks.
  • What fees do they charge, and how much are they? Do your research on the fees a traditional bank, credit union, or online bank might charge you. Most credit unions and online banks are able to offer low- to no-fee accounts due to the fact that credit unions are owned by members rather than shareholders, and online banks don’t have the operational expenses that come with maintaining physical locations.
  • What features and services matter the most to you? Make note of what you want from a financial institution when it comes to services and simplicity. Consider things like mobile banking apps and automatic savings accounts when making your decision.  

Did You Know?

Chime customers have access to 60,000+ fee-free ATMs¹ — that’s more than the top 3 national banks combined!

FAQs

Are credit unions better than banks?

This depends on what you are looking for in a financial institution. Credit unions, traditional banks, and online banks each have their respective pros and cons. 

Credit unions and online banks will likely offer you lower-cost services and better interest rate options, while traditional banks will likely provide more commercial services and products. Take all factors into consideration before deciding which type of institution is better for you.

Are credit unions safer than banks?

As long as a financial institution is backed by insurance, your money will generally be safe at either type of institution. Accounts in banks and credit unions are both insured for amounts up to $250,000 via either the FDIC or the NCUA. 

What are the pros and cons of credit unions?

Consider some of the following advantages and disadvantages of credit unions.

ProsCons
Lower feesEligibility requirements to become a member
Higher savings rates Fewer financial products available
Offers more local and personal customer serviceMay have fewer branches and ATMs
Lower interest rates on loans Less access to online technology and services
May be easier to obtain a loan with a credit union than a large bank

 

Final Thoughts

Ultimately, both credit unions and online banks are viable choices when it comes to better banking. But, before you choose which option is best for you, examine your financial situation and ask yourself what you want in a new banking provider. Consider the products and services, rates and fees, and overall accessibility of each institution before making your decision.

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