Once you start making money, one of the most important questions to ask is how - and where - you can save it. Choosing between a bank or a credit union is one of the first decisions you should make, but it's not always an easy one. We've got a breakdown of some of the most frequently asked questions.
A credit union is a non-profit institution - the members of the credit union are the owners of the credit union. Banks are for-profit corporations with shareholders. Both credit unions and banks offer basic financial services like checking accounts, saving accounts, credit cards, ATM cards, as well as loans and mortgages.
"Credit union users like knowing that there's no conflict of interest," says Bart James, personal finance expert and author of The Guide to Wise Investing in Today's Market. "If a credit union makes a profit, it goes back into the organization to help its members, whether that's in the form of a lower interest rate on a mortgage or a lower price on new checks."
With that said, most people in the U.S. choose to put their money in a bank. Typically, big banks offer better online infrastructure and more ATM locations than credit unions.
"Most banks in this country have an app, or you can access them on a mobile device, a tablet - anytime you want," says James. "You also have the luxury of using your bank's ATM at any location throughout the country."
While it's true that credit unions frequently offer better interest rates, in many cases banks are just as competitive. According to March 2012 data from interest rate website DataTrac, it depends on what you're buying.
If you're buying a car with a 60 month lease, the average interest rate at a credit union stands at 3.38%. For the same product, the average interest rate at a traditional bank stands at 5%. Meanwhile, banks offer a better option for individuals considering a 15 year fixed mortgage, with credit unions offering an average interest rate of 3.48% vs. banks that offer a rate of 3.39%.
If you're looking into a 30-year fixed mortgage, it doesn't seem to matter where you turn: the average interest rate from both banks and credit unions stands at 4.11%.
ATM fees will vary at all institutions, but having more no-fee ATMs accessible will save you money in the long run. If you join a credit union, make sure to ask if your credit union is a member of the Co-op Network, as the network offers 30,000 surcharge-free ATMs nationwide.
"Those little fees can add up in no time," says Carl Spain, executive at Consumer Banking Services in Flint, Mich. "If you need to take cash out frequently, the monthly cost for withdrawals with a $3 or $5 fee can really make a dent in your balance."
"Different credit unions have different member requirements, so if you're a plumber you can't necessarily go join a teachers' credit union," says Ben Harvey, spokesperson for the Money Management Bureau in Clearwater, FL.
"Your company may have its own credit union, or you may be eligible to join a local credit union that supports veteran's organizations or education," Harvey says. "Regardless, credit unions are not as easy to join as a bank that's open to anyone and everyone."
Most credit unions do not have in-house wealth management advisers - they typically partner with other investment service companies to assist members with items like mutual funds and IRAs, says Harvey. Banks, however, typically have an entire division of the company devoted to long-term retirement and investment planning, and the services are often cheap if not free.
"If you're looking for wealth management tools accessible at the same branch where you make deposits, a bank may be your best bet," he says. "On the other hand, credit unions have sometimes been known to offer wealth management or money-saving classes which a big bank simply doesn't have time for."
"One common misconception that drives me crazy is that credit unions somehow aren't insured as much as banks," says James. "The guarantees are there, they're just in a different package."
Credit unions are insured by the National Credit Union Administration, and member funds are insured up to $250,000. For banks, the Federal Deposit Insurance Corporation (FDIC) also ensures customer funds up to $250,000.
"Another guarantee that you have with some credit unions is the ability to elect leadership or even serve on the board of directors yourself," says James. "In a bank, you have a CEO who is bound by fiduciary duty to do what's best for the company, but you don't have any say as to who that person is or what decisions are made."
Most credit unions have a board of directors that is composed entirely of credit union members, and some have open elections during which credit union members can vote for leadership positions.
Heading out to do some comparison shopping? James advises keeping these five items top-of-mind when making a decision:
- What are the fees for using an out-of-network ATM?
- What kind of online banking capabilities do you need?
- How close is a branch to my home? What about my office?
- Will I need a home or car loan? What are those rates?
- How's their customer service - if I call, how long will I be put on hold?