Key Differences
One of the biggest differences between a local credit union and a bank – other than being for profit and not-for-profit – is its ownership. Credit unions are owned by member-owners, which means that anyone with a share account (basically a $5 deposit) technically owns a piece of their credit union. While banks, on the other hand, are owned by their shareholders. In this article, we’ll explore the various banking and financial terms that are used by both, how’re they’re similar and how they differ, and what exactly they mean to the everyday consumer.
1. Members vs. Customers
You typically don’t need to be part of a special club or group to join a credit union. While a few credit unions still hang on to their roots, and restrict membership to specific employers or industries, many credit unions are now easy to join and it’s based simply on geography. So, if you live, work, go to school or church in specific counties, you can join and become a member-owner. Credit unions don’t have a secret handshake or a code word, they’re simply an alternate option to serve your banking needs. A bank, on the other hand, is owned by a group of shareholders and treats their depositors and borrowers as customers. Typically, there are not geographic, or other requirements to become a bank customer.
2. Share vs. Account
People often associate the term share to the stock and investment world. However, the term “share” is a foundation of credit union membership as well. When a new account is opened at a credit union, that account becomes the new member’s “share.” That share becomes the launching point of their entire relationship. From there, all traditional deposit products – like Certificates and Money Market Accounts – are types of shares. While at a bank, these are simply standard savings accounts.
Savings Account Terminology:
- CD, Certificate, Certificate of Deposit, Share Certificate…these names are commonly interchangeable, with CD being most common. While they all perform similarly, with a fixed interest amount for a specified period of time, the term Certificate is unique to credit unions. So when you hear a bank advertise a CD and a credit union advertise a Certificate, the product is one in the same.
3. Dividends vs. Interest
No matter which word you use, you’re earning compensation on the money you have deposited at a bank or credit union. As part of the financial cooperative at a credit union, members are eligible for dividends distributed into their share accounts – commonly known as savings accounts, like money markets and CDs. At a typical bank, a dividend is known as interest. So essentially, as a member of a credit union, you’re receiving a dividend while as a customer at a bank, you’re receiving interest. The term dividend simply represents the concept that members own their credit union.
Earnings & Returns:
- Banks, being for-profit entities, are measured on profits. They determine interest rates based on earning income and paying shareholders; alternately, credit unions pay those earnings – called dividends – back to their members in the form of higher earnings on shares (savings accounts), and lower rates on loans as a not-for-profit financial cooperative. In a nutshell, credit unions are paying you in the form of rates, and banks are paying their stockholders in the form of personal compensation.
Understanding it All
No matter the type of financial institution you use – a traditional bank, online bank, a fintech, or credit union – all have similar products and services, they might just have different names based on the exact industry. When in doubt, ask your banking partner for clarification so you can understand how the rates and services are working for you.