Many Americans grow up learning about the banking system from their parents and grandparents. Kids love going through the bank’s drive-through with mom and dad and getting a piece of candy from the teller or a treat for the dog.
High school students usually open their first bank account when they get their first job, and college-age individuals are always talking to mom and dad about the state of their finances.
Somewhere along the way, though, you start to realize there’s more to banking than just banks. It’s also possible to keep money in a credit union, which is similar to a bank, but it has distinctions worth mentioning.
The following is a closer look at how credit unions and banks work to help you decide whether to put your money in a credit union vs bank.
Understanding How a Credit Union Works
Chances are, you’ve probably heard the words “credit union” before and just thought this was a different term for a bank. The thing is, these things are not interchangeable. A credit union is one thing, and a bank is another.
To better understand the difference between credit union and bank, you need to know what a credit union really is. Here’s how you can tell a credit union from a bank, and the pros and cons of using this money management system.
What Makes a Credit Union a Credit Union
A credit union allows you to open a checking and/or savings account, take out a loan, get a credit/debit card, and write checks. Sounds like a bank, right?
Pretty much, until you take a closer look. There are two major details that differentiate a credit union from a traditional bank.
First, credit unions are not-for-profit. This allows them to offer lower interest rates to their members on credit cards and loans!
Notice, the word used above is “members”, not “customers.” This is because when you open an account with a credit union, you pay a small deposit to become a member. The fee gives you a say in the credit union’s decision, which all members have the right to.
Banks, on the other hand, operate as corporations. You are a customer in their eyes, and the decisions made by a bank depend on the opinions and interests of stock shareholders and upper-level executives.
Still, some people prefer banking after they weigh the pros and cons of a credit union. Those details are mentioned below.
The Pros and Cons of Using a Credit Union
A few benefits of using a credit union have already been mentioned. Just to reiterate, you get lower interest rates on things you have to pay back, like credit cards and loans. You also have the chance to be more involved in decisions than you would as a bank customer.
Other benefits include:
- personalized service and attentive customer care
- higher interest on savings*
- less hidden fees or other complications
*Higher interest in terms of personal savings is a good thing. This basically means the longer you have your savings account, and the more money you add to it, the more interest the credit union pays you!
However, these things come with a few negative points, too. The thing that holds most people back from choosing a credit union is that they tend to be locally-oriented. So, if you travel a lot or you plan on moving in the near future, a credit union may create more complications than you’re interested in dealing with.
Other cons include fewer money management options than a bank can offer and generally less advanced digital banking systems.
Understanding How a Bank Works
Maybe you’ve only ever used a bank, and you think you know exactly how it works. Keep in mind, though, not all banks are the same.
It might be time to reevaluate your definition of a bank and take a close look at the benefits it offers you. Who knows, you may just find new ways to get the most out of your current bank just by doing a little bit of research!
The Definition of a Bank
A bank is a for-profit financial institution authorized to write loans and receive deposits. These organizations are either regulated by a nation’s government or some sort of central bank within a country/union of countries. For example, the U.S. has the United States Treasury while many countries in Europe operate under the European Union.
Wherever you are, there are a few pros and cons of banking that tend to be the same. Check them out in the next section.
The Pros and Cons of Opening a Bank Account
Close your eyes and think about your drive to and from work every day, or around the downtown area of where you live. Chances are, there are plenty of banks along each route, not to mention all the ATMs and special partnerships banks have with many companies.
This makes access to your money and money management much simpler. With a bank, you can go to an ATM that’s within your bank without necessarily having to go to a branch. You can go overseas or across the country with ease, and perform many different financial functions from your phone or computer.
But, this does come at the cost of higher interest rates on money you borrow (credit cards and loans) and less of a personalized experience. Banks are also sponsors and partners of many different things. If you’re one to use your buying power to support causes and social initiatives you believe in, take the time to look into what your bank supports.
Credit Union vs Bank: The Final Decision
At the end of the day, the credit union vs bank debate comes down to personal financial needs. Some people love the convenience of a traditional bank, while others are more appreciative of the community feel of a credit union.
The choice is up to you. Remember, this is just one part of understanding how finances work and making the most of the money in your wallet. Have you looked into getting a credit card to build points or opening a college fund for your children yet?
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