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  • Credit Unions vs. Banks: What are the Differences?

    2019-08-27T10:24:44-06:00By |Personal Finance|

    On the outside, credit unions and banks seem very similar. Most people don’t fully understand the differences between the two. While there are many similarities, there are also some very key differences.

    The Tax Status: Not-For-Profit vs. For-Profit

    You may not know this, but despite being highly regulated, credit unions are not corporations, so they’re not required to pay federal corporate income taxes. This is because credit unions are not-for-profit 501(c) organizations.

    As a not-for-profit, credit unions are owned by the members they serve, which means if you have an account at a credit union, you’re an owner. Banks, on the other hand, are corporations designed specifically to create a profit, and they’re owned by shareholders.

    This tax status is an issue of much debate. However, this situation is common among nearly every industry in America. For example, there are for-profit and there are not-for-profit hospitals. All of them offer the same care and the same services, but one pays a corporate tax and the other does not.

    Banks argue that because credit unions are larger than they used to be, offer more products than they used to, and serve a broader audience than they used to, they should be taxed in the same way banks are.

    Former National Credit Union Administration Chairman Dennis Dollar said it best when he explained the tax exemption in an interview in 2018:

    “It would be like the people at Nabisco saying that the Girl Scouts should be taxed like them because they are bigger than they used to be, sell more flavors than they used to sell, and offer their cookies to more people than before.”

    Dennis Dollar

    Former National Credit Union Administration Chairman


    What Do Credit Unions Do With All the Money They Save?

    This is where credit unions really differentiate themselves from banks. Obviously, credit unions save a lot of money by not having to pay federal corporate income taxes. That money is put right back into the organization, which is why credit unions can offer fewer fees, higher yields on savings accounts, checking accounts, and share certificates (CDs), as well as lower rates on auto loans, personal loans, and home equity loans.

    It also gives credit unions a budget to educate members about money. Financial literacy is a need for many people throughout the country, and credit unions prioritize that because it helps members become more successful in the long run.

    The Experience: Helping vs. Selling

    The goal of a credit union has always been and always will be to help those in need. Credit unions are focused on helping you reach your goals, not selling products. If a particular loan doesn’t make sense for your financial situation, a credit union will work with you to find the right solution. Since banks are so focused on selling products and making profits, they are more likely push a loan on you, even if it’s not in your best interest.

    Here’s a story from a Connexus employee who used to work at bank:

    “An older woman regularly visits our branch. Usually positive and upbeat, I knew I had to help when she came in one day looking nervous. Her husband was going to a nursing home, and she couldn’t afford it. Instead of trying to sell a personal loan, I wanted to give her a longer term solution. I set her up with our financial advisor who was able to create a plan. I’m thankful to work at a credit union because when I used to work at a bank, the expectation would have been to sell a loan, regardless of whether it was the right option.”

    Aaron Awve

    Connexus Credit Union Senior Member Service Representative


    The Savings: Rates, Yields, & Fees

    As we mentioned in the tax status section, credit unions generally charge fewer fees, have lower loan rates, and have higher deposit yields. When you compare the numbers it becomes clearer.

    For example, because of how much better Connexus’ rates and yields are when compared to the average bank, Connexus members saved a total of $27.8 million by choosing Connexus over the average bank. That’s nearly $90 per member.

    The Support: Giving Back to Communities

    This is heavily dependent on the credit union or bank you use, but in general, credit unions are known more for their community efforts. To be fair, several of the largest U.S. banks are among the most charitable Fortune 500 companies. However, credit unions are rooted in their communities regardless of whether they have branches in other cities or states.

    In 2018, Connexus did all this:

    $65,903.61
    Donated to Relay For Life (#45 team in U.S.).

    $1,000,000
    Connexus Cares planned giving in 2019.

    $50,000
    Donated to Boys & Girls Club.

    $16,751.66
    Donated to the United Way.

    1,215
    Members we offered financial assistance to after Hurricanes Florence and Michael.

    500+
    Food items donated to local food pantries.

    The Result: Credit Union or Bank?

    At a credit union you’re a member/owner. At a bank, you’re a customer. Don’t be fooled by the big sponsorships and national TV commercials. A bank’s purpose is to make money. A credit union’s purpose is to help people like you — it’s that simple.

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