Have you ever thought about the difference between a bank and a credit union? Banks are part of a national or global business with local branches that offer financial services such as checking and savings accounts, mortgages, and loans. Credit unions offer those same services—checking, savings, retirement accounts, mortgages, loans. But credit unions serve a specific region or group, and they don’t have customers; they have members. The biggest difference between banks and credit unions can be summed up in a single word—community.
Consumers continue to be disappointed by unsavory bank practices. Wells Fargo, for example, was fined $185 million in 2016 for opening unauthorized accounts, and another $2.09 billion by the Justice Department in 2018 for underwriting risky mortgages and contributing to the economic crisis of 2008. These types of unethical business practices are often initiated by greed at the corporate level and pressure to generate more profits to satisfy shareholders. Unfortunately, it’s the bank customers who suffer. With credit unions, however, the members are the shareholders, so business decisions are made to benefit the local community. (If you know the holiday film It’s a Wonderful Life, George Bailey’s struggle to keep his Building and Loan from being taken over by Potter’s bank is a dramatized example of the David and Goliath difference between credit unions and banks.)
Unlike banks, credit unions are established to serve a defined group or community. Members entrust their money to their credit union, just as they would deposit money in a bank, but that money stays in the community.
Investing in the Neighborhood
By definition, a credit union is a financial cooperative owned by its members and governed by a board of directors who are also members. The credit union community can be defined in many ways: e.g., as employees of the same company, members of the same union, or residents of the same region. Many credit unions define their community geographically. iQ Credit Union, for example, was started by a school teacher in 1940 and today serves anyone who lives, works, or goes to school in Washington state or Oregon’s Clackamas, Columbia, Hood River, Multnomah, Washington, or Yamhill Counties.
Credit unions were originally created in the 19th century as an alternative to banks, allowing neighbors to pool their monies to help one another without having to pay the crippling interest rates being charged by the banks. By putting their money together, credit union members are able to help other members by lending money and providing banking services.
Unlike banks, credit unions are not-for-profit institutions, meaning profits are returned to credit union members, usually in the form of better rates, low or no fees, and new products and services. Credit unions are also able to offer free financial education and member benefit programs.
People Helping People
Since a credit union serves the members of the community, rather than a corporation such as a bank, it gives back to that community as well as providing other benefits to members that banks don’t typically offer. Here are just a few of the benefits that help the credit union community:
For people, not for profit. Since credit unions are not for profit, they don’t need to maximize returns to please shareholders. As a result, members get more free services, lower interest rates on loans, and even dividends. Profits go right back into services for the member community.
Service driven. Credit unions often have higher customer service ratings, due to more personalized service. In the American Customer Satisfaction Index Finance and Insurance Report 2017, credit unions scored 82 out of 100 in customer satisfaction, ranking them higher than banks.
Member-owned. Credit unions are member-owned, so they tend to have extremely high satisfaction ratings. For example, decisions about extending credit or providing loans are based on criteria designed to serve members, and the credit union often can bend the rules if it seems appropriate. In fact, most credit unions embrace the credo “people helping people.”
More flexibility. Credit unions also are able to offer products that don’t appeal to the big banks. For example, your credit union might be willing to make a loan where a bank would not. Or you may operate a small business and need an influx of cash, but the business is too small to qualify for a conventional small business loan. Your credit union may be able to help with a microloan or some other financial solution.
Educational funding and scholarships. Many credit unions reinvest their profits by funding special education programs or giving out scholarships and low-interest student loans. Investing in local education is just one way credit unions give back to the community.
Financial education. One area where credit unions outshine banks is in promoting financial literacy. Financial planning skills have to be taught, and credit unions like iQ offer student education programs, support school classes, provide online courses, and include other financial education services.
Community support programs. Since credit unions are member-supported, they typically have different programs designed to give back to the community. iQ Credit Union, for example, has iQ for Kids, a nonprofit organization dedicated to supporting local and national charities committed to improving the lives of children.