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What are the Differences Between Credit Unions and Banks?

What you'll learn: Whether a credit union or a bank is better for your financial situation


Whether you've moved to a new city or you're just looking to change to a different financial institution, it's smart to compare credit unions vs. banks to see what's the best choice for you. There are some significant differences between a credit union and a bank you need to know about. Read on to learn more about those differences so you can make an informed financial decision.

What is a Credit Union? 

A credit union is a not-for-profit, cooperative financial institution.

You're probably familiar with other cooperatives, such as co-ops for health food, organic produce, or dairy products. With those co-op examples, the people who use their products and services actually own the organization. Credit unions are no different.

Instead of being owned by stockholders, credit unions are owned by their members. In fact, when you open an account at a credit union, you own a small fraction of that credit union. That's why your initial savings account is called a "share account."

Most credit unions offer the same products as banks. Credit unions offer savings accounts, checking accounts, credit cards, auto loans, mortgages, home equity products, personal loans, and more.

Types of Credit Unions

According to the National Credit Union Association (NCUA), there were 5,099 federally insured credit unions in the U.S., as of 2020.

Credit unions can range from local organizations with hundreds of members to national organizations with millions of members. Regardless of size, there are two types of credit unions: state-chartered and federal-chartered.

  • State-Chartered: State-chartered credit unions are under the regulatory authority of their state. For example, each state would have its own governmental regulating divisions like these: California, Washington State, Texas, New York, and Florida. Arkansas, Delaware, the District of Columbia, South Dakota, and Wyoming do not have state-specific charters. Credit unions operating within those states must be federally chartered.
  • Federal-Chartered: The NCUA regulates and supervises all federal credit unions (FCU). For comparison, PenFed is the second-largest federal credit union in the nation, with $26 billion in assets and more than 2 million members.

How Does a Credit Union Work?

A credit union's primary purpose is to give back to its members. Because as a cooperative, credit union members pool their money, meaning money that comes into the credit union is then used to fund loans.

Credit unions then give their profits back to their members in the form of lower interest rates, higher dividends, fewer fees, and more charitable programs to improve their communities.

Because credit unions are owned by their members, one of the perks of that membership is having the power to elect the board of directors. Each member of a credit union has the ability to influence the organization by voting for board members.

Benefits of Credit Union Membership

"Credit union members benefit from generally better interest rates, lower fees, and the knowledge that their financial institution is dedicated to improving their financial well-being," notes Credit Union National Association President/CEO Jim Nussle. "Big banks work for their shareholders, while credit unions like PenFed are focused on promoting the interests of their more than 120 million members." Credit Union membership may offer such perks as:

  • Financial Education: Part of any credit union's commitment to its members and communities is to teach financial best practices. Many credit unions offer financial education or counseling options to their members. This is especially important for people dealing with financial hardship. Part of the credit union's mission is to help those who are less fortunate. That's the credit union way. 
  • Sharing the Same Values: Credit unions were designed to bring together people who share a common bond. For example, credit unions are often founded to support a specific group, such as military members and their families. Joining like-minded credit unions shows support to that group because all the members benefit as the credit union grows.
Big banks work for their shareholders, while credit unions like PenFed are focused on promoting the interests of their more than 120 million members.

What is a Bank?

A bank is a financial institution owned by a group of shareholders. The purpose of any bank is to make money for those shareholders. As a for-profit business, a bank exists to make money from the products and services it offers.

Types of Banks

According to the Federal Deposit Insurance Corporation (FDIC), there were 5,177 commercial banks and savings institutions in the U.S. insured by the FDIC, as of 2020.

There are several different types of banks. We're going to review the top four you've probably heard of.

  • Retail Bank: A retail bank offers services to the general public vs. corporations or companies. These banks bring in customer deposits, and they offer services such as checking, savings, mortgages, credit cards, auto loans, and lines of credit.
  • Commercial Bank: A commercial bank offers services to both individuals and companies. The bank lends to businesses and makes money from the interest they charge on their loans.
  • Investment Bank: To put it simply, investment bankers connect parties with capital to parties looking for investors. Similar to realtors, they operate as the middleman, bringing together buyers and sellers.
  • Online Bank: Online banks don't have a physical location, as they operate solely online. They offer lower fees, but it can be more difficult to deposit cash.

Some banks even have separate divisions offering services to retail, commercial, and investment clients.

How Does a Bank Work?

When you deposit money into your savings account, the bank will pay you interest. The bank then uses the money you've deposited to fund loans out for their customers. The longer you agree to keep your money in the bank, the more interest the bank will pay you.

The bank then loans your money to people for different types of loans. The borrower pays back the loan along with interest that's much higher than what the bank is paying you.

So basically, the bank is a middleman, making money by lending other people's money. The shareholders then receive the profits.

Unlike credit unions, the board of directors at a bank are paid for their efforts. The compensation varies per bank, but it can add up to substantial amounts of money.

Differences Between a Credit Union and a Bank

There are several significant differences when you compare credit union vs. bank. Let's review the most important ones.  

Credit Union vs. Bank Eligibility

Bank eligibility is simple. Anyone can become a bank customer. Credit union eligibility is slightly more complex, but we'll make it easy to understand.

As we said earlier, credit unions were designed to bring people together who share a common bond. These are some common bond examples:

  • Military members
  • Teachers
  • Firefighters
  • Employees of a specific company
  • State or county employees
  • Residents of a specific location

Credit unions require you to be a part of their common bond to become a member. However, there are some credit unions in the U.S. that allow anyone to become a member as long as they join a specific association (a common bond). For example, if you pay $5 to join an association related to a particular credit union, you become eligible for membership to that credit union. That $5 may then be used by that association for charitable purposes.

For-Profit vs. Not-for-Profit (Federal Income Tax)

Although they both provide financial services, banks and credit unions have different business models.
As we mentioned above, banks are for-profit corporations while credit unions are not-for-profit organizations. That distinction means there are differences in their tax status.

Because banks are for-profit companies, they are required to pay federal income tax. But since credit unions are not-for-profit organizations, credit unions are not required to pay federal income tax.

So, what do credit unions do with all that extra money? They put it right back into the organization and community. Those "savings" are what allow credit unions to support their communities and offer lower rates, higher dividends, and fewer fees.

Rates & Fees

Like we just said, credit unions typically offer lower rates and fewer fees. That's because credit unions have tax exemptions, and they don't have to pay shareholders.

If you inquired about opening a checking account in both a bank and a credit union, you'd find the credit union likely has fewer fees on checking and savings accounts. Plus, the fees they do have may be lower. Additionally, the interest they charge their members on loans is often lower, which means more money stays in your pocket.

And when it comes to dividends, credit unions, on average, offer higher returns. You can see by these charts from the NCUA that credit unions outperform banks year after year. That's a major factor for rising credit union membership, and why many Americans are switching from banks to credit unions.


With credit unions, the members are the owners, and they profit when the credit union profits.

Shareholders own banks and receive the bank's profits. For example, Warren Buffet owns a substantial amount of Bank of America stock, so when the bank does well, he earns more money.


Both credit unions and banks insure deposits up to at least $250,000 per individual depositor or share owner. The NCUA insures all credit unions. The Federal Deposit Insurance Corporation (FDIC) insures banks.


When it comes to technology, there's a myth that banks offer more online services than credit unions. That may have been true years ago, but today online and mobile banking is available at most financial institutions, regardless of credit union vs. bank.

Are Credit Unions Safer Than Banks?

The safety of your money is critical when deciding between a credit union and a bank. Thankfully, there's not much difference between a credit union and a bank when it comes to security. Both institutions are likely to offer industry-standard encrypted security measures.

Should I Use a Credit Union or Bank? 

Now that you've looked at credit unions vs. banks and you understand the differences between them, you have everything you need to make your decision. When narrowing down your options, make sure to compare the rates and fees, the online access, and whether it's important to you to have a voice when it comes to selecting the institution's leadership.

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