If you’re looking for a new bank, there’s plenty of competition to choose from, including big banks and smaller local banks. But what about credit unions? What are the main differences between a credit union and a bank, and what are their advantages and disadvantages?
What is a credit union?
Credit unions are membership-based financial institutions. Becoming a customer of a credit union means becoming a member, which in turn means becoming a part-owner of the credit union.
Historically, many credit unions were founded as community organisations, intended to service the financial needs of specific geographical areas (e.g. rural areas, outlying suburbs, regional centres), or workers in particular industries (e.g. police, nurses, rail workers, teachers). Members of these credit unions would pool their money to provide financial services to one another.
Today, most credit unions no longer limit their membership, and are open to anyone. Many have also started changing their names to help avoid confusion. Credit unions offer many of the same services as banks, including savings and transaction accounts, home and personal loans, credit cards and term deposits.
What’s the difference between banks and credit unions?
The biggest difference between a credit union and a bank is that while banks are typically owned by shareholders, credit unions are owned by their members. While banks often use their profits to pay dividends to shareholders, credit unions use their profits to provide added benefits to their members, such as lower fees or reduced interest rates.
How banks and credit unions are the same
Both banks and credit unions are recognised as Authorised Deposit-taking Institutions (ADIs) under the law. If a bank or credit union was to go out of business, there are government regulations in place to help guarantee and protect your money.
Because credit unions are regulated similarly to banks, and because laws around ADI naming recently changed, some credit unions have started rebranding themselves as “banks” in recent years.
Advantages of credit unions
Thanks to their history as community-based institutions, credit unions often provide services with a personal touch and understanding of local needs.
Because of their smaller size compared to the big banks, and closer focus on providing services to members instead of providing dividends to shareholders, credit unions can be more competitive when offering services, such as more affordable interest rates and lower fees.
Disadvantages of credit unions
Some credit unions and smaller mutual banks are only able to provide local branch services. If you’re located outside the areas they cover, it may be harder to access face to face banking services. You may still be able to access some branch services from Australia Post outlets, or you could bank remotely by phone or by using online banking apps and similar platforms.
Credit unions often provide competitive financial products and services, but they may not always offer as great a variety of options as larger banks.
Big banks often have multiple branches servicing metro areas and regional centres, and can also offer a wide range of financial services, which can be accessed over the phone and online.
Before you switch banks or credit unions, it’s essential that you compare the features, benefits, fees and charges of available options, look at your personal financial situation, and work out which options may be right for you. If you’re not sure, consider contacting a finance counsellor for more personal advice.