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. Unlike banks, credit unions exist solely to serve their members, not to pay high dividends to an outside group of stockholders. Credit union income is returned to members and that’s why credit unions can offer higher interest rates on deposits and lower rates on loans.
Credit unions and banks differ in four significant areas: Membership, Rates/Fees, Structure and Taxes. Below describes some of the basic differences in each of the categories.
- Under federal and state laws, credit unions may only offer membership to individuals who belong to a select group. Other credit unions’ field of membership is defined by geographic boundaries, known as community charters.
- Banks face no restrictions on who they serve
Rates and Fees
- Membership requires a deposit of as little as $25
- On average, compared to banks, credit unions pay members higher dividend rates on deposit accounts and offer loans at lower interest rates
- Earnings from credit unions are given to members in the form of higher deposit rates and lower loan rates
- Fees, such as NSF and overdraft fees, are generally lower
- Banks usually require a minimum deposit of $50 to $100 to open an account
- Compared to credit unions, banks pay the customer lower interest rates on deposit accounts and offer loans at higher interest rates
- Credit Unions are member-owned, not-for-profit financial cooperatives
- Credit Unions operate under a one member, one vote system
- Most credit unions have volunteer, unpaid boards
- Earnings of credit unions are returned to members in the form of higher interest rates on deposit accounts and lower loan rates (minus operating expenses)
- Banks are for-profit, board and stockholder controlled, financial corporations
- Stockholders hold influence in the bank based on the total value of their stocks
- Customers of a bank who are not stockholders do not own a financial interest in the bank
- Profits of banks are divided among the stockholders (minus operating expenses)
- 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
- Credit Unions were granted by Congress, a federal tax exemption based on their unique structure as non-profit cooperatives
- Banks do pay federal income taxes on corporate profits, although there are many banks that qualify for tax exempt status under subchapter S of the IRS Code.