Comparing Credit Unions and Banks

If you're not sure what the difference is between banks and credit unions, this article compares the many significant differences and will help you discover how credit unions can offer benefits banks can't match.

See why credit unions are the smart choice:

1. What is a credit union?
2. How do banks and credit unions differ in structure and membership?
3. How do they compare in rates and fees?
4. How do they compare in market share and asset growth?
5. What about taxes?

1. What is a credit union?

Credit unions are financial institutions formed by an organized group of people with a common bond. Members of credit unions pool their assets to provide loans and other financial services to each other. Unlike banks, credit unions exist solely to serve their members; and do not have to pay dividends to an outside group of stockholders. Instead, credit union income is returned to members in the form of better rates, lower fees and innovative services.

Credit unions promote the financial well-being of members, including those of modest means, through a system that is cooperative, member-owned, volunteer-directed and not-for-profit – therefore a credit union will look for ways to keep the costs as low as possible for the members while remaining competitive and safe and sound, rather than looking for ways to make a profit for stockholders.

2. How do banks and credit unions differ in structure?

Credit unions are member-owned, not-for-profit financial cooperatives. As a result decisions are based on meeting the financial needs of the membership.

Here are some facts about how we operate:

• Credit unions operate under a "one member = one vote" system, regardless of the amount of money the member has at the Credit Union.
• Most credit unions have volunteer, unpaid boards that are elected by the members of the Credit Union.
• Under federal and state laws, credit unions may only offer membership to individuals who belong to a select group or defined by specific geographic boundaries.

Banks are for-profit financial corporations controlled by a board and stockholders who hold influence in the bank based on the total value of their shares. Customers of a bank (who are not stockholders) do not own a financial interest in the bank.

Here are some facts about how banks operate:

• Boards are compensated for their service.
• Profits of banks are divided among the stockholders.
• Banks face limited or no restrictions on who they serve

3. How do banks and credit unions compare in rates and fees?

Banks usually require a higher minimum deposit of $50 to $100 to open an account. Compared to credit unions, banks generally pay customers lower interest rates on deposit accounts and higher rates on loans. Earnings from a bank are given to stockholders as profit sharing.

Membership in a credit union requires a deposit of as little as $5. Credit unions offer attractive pricing that puts pressure on the other financial institutions to offer more attractive rates, although in many cases not as low as a credit union. Without credit unions, bank customers would most likely pay more for their financial services.

4. How do banks and credit unions compare in asset size and market share?*

• Total credit union assets are $770 billion vs. $13.0 trillion total bank assets
• The largest bank (Citigroup) has more assets, 2.2 trillion, than all US credit unions combined
• Average credit union asset size is $93 million vs. $1.53 billion average bank asset size
• Credit Unions have grown to $770 billion in 99 years, while banks grew $1.2 trillion in 2007 alone
• Total credit union market share is 6%, while total bank market share is 81%

*As of December, 2007.

5. How do banks and credit unions differ when it comes to taxes?

Credit Unions were granted by Congress a federal tax exemption based on their unique structure as non-profit cooperatives. Therefore, credit unions do not pay federal income tax on earnings; however, state-chartered credit unions do pay other relevant taxes such as payroll, property and sales taxes.

Banks do not have a tax exemption because they are a for-profit business intended to provide profits to their stockholders. So, banks do pay federal income taxes on corporate profits—although 29% of banks operate under subchapter S of the IRS Code which provides significant tax breaks.

Next steps: If you'd like to learn more about credit unions, see our article about Seven Cooperative Principles of Credit Unions.