How Is a Credit Union Different From a Bank?

A bank is a financial institution that accepts deposits from the public and uses these funds to make loans. Banks provide a secure location for individuals and businesses to store money, offering various financial products such as savings accounts, checking accounts, and credit services.

A credit union, by contrast, is a not-for-profit financial cooperative that also accepts deposits and makes loans. Like banks, credit unions offer a range of financial services, including checking and savings accounts. Their structure means they operate with a different purpose compared to traditional banks.

Ownership, Purpose, and Tax Status

The fundamental difference between a bank and a credit union lies in their ownership structure and operational purpose. Banks are for-profit corporations, owned by private investors or shareholders. Their primary objective is to generate profits for these shareholders, which influences decisions regarding interest rates, fees, and the types of services offered to customers.

Credit unions are financial cooperatives owned by their members. When an individual joins a credit union, they become a part-owner, giving them a voice in the institution’s direction. This member-centric model means that a credit union’s primary purpose is to serve the financial needs of its members, rather than maximizing profits for external shareholders. Any surplus earnings are reinvested into the institution to benefit members through reduced fees, higher savings rates, or lower loan rates.

Banks operate as taxable entities, subject to federal and state income taxes on their profits. This is a direct consequence of their for-profit, shareholder-driven business model. Their tax obligations are factored into their operational costs and pricing strategies.

Credit unions, due to their not-for-profit, cooperative structure, are exempt from federal income taxes under provisions like 26 U.S. Code Section 501(c)(1) and the Federal Credit Union Act. This exemption is rooted in their mission to promote thrift and provide credit for provident purposes to their members. While exempt from federal income tax, credit unions still pay other taxes, such as payroll, sales, and property taxes.

Membership, Services, and Pricing

Access to financial services differs between banks and credit unions, particularly concerning membership. Banks are open to any individual or business that meets their account opening requirements, with broad eligibility criteria, serving a wide and diverse customer base.

Credit unions, in contrast, typically have “field of membership” requirements. To join, an individual must share a “common bond” with existing members, such as working for an employer, belonging to an association, or living within a defined geographic community. While some common bonds are very specific, others can be quite broad, making membership accessible to many.

Both types of institutions offer a similar array of fundamental financial services, including checking accounts, savings accounts, credit cards, and various types of loans like mortgages and auto loans. Banks provide a broader spectrum of specialized financial products, such as investment banking services, international banking, and wealth management for high-net-worth clients. Credit unions focus more on core personal financial services and may emphasize financial education and local community lending initiatives.

The pricing of services, including interest rates and fees, often reflects the underlying business models. Because credit unions prioritize member benefits over profit, they frequently offer more competitive interest rates on savings products and loans. This can translate to higher returns on deposits and lower borrowing costs for members. Credit unions also tend to have fewer fees for services like account maintenance, overdrafts, and ATM usage, which can result in cost savings for members. Banks, driven by shareholder profit objectives, may have higher fees and lower interest rates on deposits to maximize revenue.

Regulation and Account Protection

Both banks and credit unions operate under robust regulatory frameworks designed to ensure the stability of the financial system and protect consumers. Banks are primarily regulated by federal agencies such as the Federal Reserve, the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC), along with state banking departments. These agencies oversee various aspects of bank operations, including capital requirements, lending practices, and consumer protection.

Credit unions are similarly regulated by federal and state authorities. Federally chartered credit unions are overseen by the National Credit Union Administration (NCUA). State-chartered credit unions are regulated by their respective state credit union departments, with the NCUA also insuring many state-chartered institutions.

Federal deposit insurance protects consumers at both types of institutions. Deposits at FDIC-insured banks are protected by the Federal Deposit Insurance Corporation (FDIC). Deposits at federally insured credit unions are protected by the National Credit Union Share Insurance Fund (NCUSIF), administered by the NCUA. In both cases, the standard insurance coverage is up to $250,000 per depositor, per institution, for each ownership category. This comparable level of insurance ensures that funds held in either a bank or a credit union are safeguarded up to the specified limits.