Credit Union or Community Bank: Which is Better?

When it comes to your money, you have a lot of options of where to put it. Two very popular options are a community bank or a credit union. These two terms often get used interchangeably, but they are actually different things. These differences may affect which option is best for you. So we put together this quick article on the major differences between community banks and credit unions, and the pros and cons of each. 

What is the Difference Between a Community Bank and a Credit Union?

Community banks and credit unions share many features in common. They are both owned by members rather than shareholders and they typically service local communities rather than large banks and other financial institutions.

The main difference between the two is that community banks are for-profit institutions that are owned and operated by the community it serves. Credit unions are members-only non-profit organizations that provide financial services to members.

In contrast, large megabanks are for-profit institutions that are owned by shareholders, not the community the bank serves. So compared to megabanks, both credit unions and community banks put much more control in the hands of the local community.

Here is a quick way you can think of the differences between the three:

• Large bans – for-profit/shareholder-owned
• Community banks – for-profit/customer-owned
• Credit union – non-profit/member-owned

Community Banks

Community banks often have a similar structure to large banks, they are just owned by the actual members of the community that they serve rather than large financial institutions and shareholders. Whereas large banks emphasize dealing with big businesses, community banks tend to work with individuals or moderate-income. Community businesses also tend to work with local small businesses.

Although community banks are often integrated into the communities they serve and are responsive to their needs, they are largely for-profit institutions. To that end, their fundamental structure is not different from a large bank, only the size, focus, and orientation they have. Community banks are oriented towards the community and are often owned by the people that use their services.

Credit Unions

Credit Unions, in contrast, are non-profit cooperatives that have a fundamentally different ownership structure than community banks. Credit unions are made of members, each of which has voting rights and a say in what happens with managerial decisions. Credit unions, therefore, share the same focus as community banks, they just make that focus more explicit through their legal structure and ownership.

In general, credit unions have relatively strict requirements for joining. They may require you to have a certain income, live in a specific place, or be part of some specific group (like teachers or a labor union). In contrast, community banks have much laxer standards for opening accounts and getting services.

Also, since credit unions are members-only, they are often smaller than community banks and cannot offer the same range of financial products and services.

Community Bank Pros & Cons

Pros

• Product offerings. Community banks tend to offer more products and services than credit unions. Community banks offer most of the same services you would find at large banks like home loans, savings accounts, etc.
• Integrated in the community. Community banks are responsive to the needs of the communities they serve and forge strong bonds with local communities. Community banks are often owned and staffed by locals from the area.
• Work with individuals. The vast majority of clients at local banks are individual people or families. The kinds of products and services that they offer are tailored for the average American. A community bank is more likely to work with your individual situation.
• Lower fees. Compared to large banks, community banks charge lower fees and interest rates on products. For example, getting a home loan with a community bank will give you a lower interest rate than with a large bank.

Cons

• Higher interest rates. In general, community banks offer higher interest rates on products than credit unions. This is because community banks are for-profit and charging interest is how they make money. For example, a bank will likely have a higher interest rate on a credit card than a credit union.
• Lower deposit rates. At the same time, community banks usually have lower deposit and savings rates than credit unions. Credit unions usually have higher interest rates on CDs and savings than banks.

Credit Union Pros & Cons

Pros

• Lower interest rates. Since credit unions are nonprofit, they can afford to charge relatively lower interest rates on things like loans and credit cards compared to banks.
• High deposit rates. At the same time, credit unions can provide larger savings rates on deposits. The average credit union APY for a CD account is 1.32%, which is a fair deal higher than the ~1% rate for community banks.
• Member-owned. Credit unions are by definition owned by members so there is little conflict of interest between owners and members. Members vote on managerial staff to represent them.

Cons

• Membership is more restrictive. Not just anyone can join a credit union. You have to apply and meet certain requirements. For example, you might have to work in a certain profession or have a family member already in the credit union to join.
• Small size. Since credit unions are small, they often cannot provide the amount of services or capital that banks can. For example, credit unions might not be able to fund a business loan if the amount is too high.

Conclusions

At the end of the day, both community banks and credit unions are a great change of pace from traditional megabanks. Community banks and credit unions are focused on the needs of the community and members that they serve. However, when it comes to the range of products and services that you can get, community banks strike the perfect balance between services offered and competitiveness. A community bank can fund your small business venture and it is much easier to get products from a community bank than from a credit union.