Credit unions vs. banks: how they differ

This guide is for you if you want to open an account, or switch, and are not sure whether to choose a credit union or a bank. You will see how they are alike and how they differ, who can join a credit union, how federal insurance protects your money and how to check it, which rules protect you on fees, which documents you may be asked for if you have an ITIN or a passport, and what PAL loans and CDFIs are. We do not recommend any institution: we report what official sources say.

Minimum federal insurance per depositor and ownership category at each FDIC-insured bank

$250,000⁴

At an NCUA-insured credit union, each member has at least the same coverage.²

What you may be able to open a bank account with, according to the FDIC

$25¹⁰

The amount of a PAL I loan at a federal credit union

$200 to $1,000¹³

When you can be charged overdraft fees on debit purchases or at ATMs

Only if you opt in⁷

What a credit union is and how it compares to a bank

According to the NCUA (the National Credit Union Administration), a credit unioncredit unionA credit union is a not-for-profit financial institution that, like a bank, accepts deposits, makes loans and offers other services, but is owned by its members. Members elect a volunteer board of directors, and profits go back to them as lower fees, higher savings rates and lower loan rates. To join you need a common bond, such as your employer, your family, where you live or a group you belong to. It is chartered by the NCUA, a federal agency, or by a state. If the credit union is federally insured, your deposits are protected by the NCUA's insurance fund.See the full definitionClose is a not-for-profit financial institution that accepts deposits, makes loans and offers other financial services, just like a bank. The difference is ownership: a credit union belongs to its members, who control it, and a volunteer board they elect runs it.¹

Its profits go back to members as lower fees, higher savings rates and cheaper loans. Unlike banks, it returns surplus income to members as dividends. The NCUA says that, on average, credit unions offer higher savings rates and lower loan rates, and tend to charge lower fees and require lower balances.¹ Those are averages: compare the fee disclosures of each one.⁶

Credit union and bank, side by side

Owned by its members

Credit union

• Not-for-profit; its members control it.¹
• To join you need a common bond, such as your job, your family or where you live.¹
• If federally insured, the NCUA covers at least $250,000 per member.²
• If it is a federal credit union, it may offer payday alternative loans (PALs).¹³

Open to the public

Bank

• If FDIC-insured, it covers at least $250,000 per depositor and category.⁴
• Many open accounts for noncitizens with a passport, consular ID or ITIN.¹⁰
• It must give you fee disclosures before you open the account.⁵

Both must give you fee disclosures before you open the account⁶ and neither can charge you debit or ATM overdraft fees without your consent.⁷

Who can join a credit union

To join a credit union you need to share its common bond, called its field of membership. According to the NCUA, you may be able to join:¹

• Through your job: many employers sponsor their own credit union.
• Through your family: most credit unions let members’ families join.
• Through where you live: many serve anyone who lives, works, worships or attends school in a certain area.
• Through a group: belonging to a place of worship, a school or a labor union may qualify you.

Ask the credit union about its field of membership before you bring your papers. If your partner, parents or siblings are already members, mention it.¹

Your money, insured: FDIC and NCUA

At an FDIC-insured bank (the Federal Deposit Insurance Corporation), your deposits are insured to at least $250,000 per depositor, per ownership category, at each bank. The fund is backed by the full faith and credit of the U.S. government. It covers only deposits and only if your bank is FDIC-insured; it does not cover investments, even if the bank sells them to you.⁴

At a federally insured credit union, insurance is automatic when you join, and each member has at least $250,000 in total coverage for their accounts. It is also backed by the U.S. government.² The NCUA says no one has lost a single penny of insured deposits at a federally insured credit union.³

How to check. For a bank, the FDIC asks you to look it up in its BankFind Suite tool.⁴ For a credit union, use the NCUA’s Credit Union Locator. Insured credit unions must display the official NCUA sign at their teller stations and on their website, and they cannot drop federal insurance without notifying members. A federal credit union’s official name includes the words “federal credit union.”²

What is not covered. Neither the FDIC nor the NCUA covers investments such as stocks, bonds or mutual funds, or life insurance and annuities, even if your bank or credit union sells them.⁴² The NCUA does not insure cryptocurrencies either.³ If you have more money than the limit, the FDIC’s EDIE calculator estimates how much is covered.⁴

Fees, overdrafts and the disclosures you must receive

Before opening an account, ask for the disclosures. The law requires banks and credit unions to give them to you before you open an account or receive a service, and they must state each fee that may be charged, or how it is calculated, and when it applies.⁵⁶ At credit unions these are called Truth in Savings disclosures, and they list fees for dormant accounts, returned checks or insufficient funds. Some institutions lower fees if you bank online.⁹

Overdrafts. Under Regulation E, the institution holding your account may not charge you for covering an ATM withdrawal or a one-time debit card purchase through its overdraft service unless it explains the service in writing, gives you the chance to accept it, you opt in and it confirms your choice in writing. You can revoke your consent.⁷ The rule applies to banks and credit unions alike: under Regulation E, a financial institution includes banks and credit unions.⁸ That is why, when you open a checking account, a credit union will ask whether you want its overdraft program; if you say yes, it will charge the fee on its schedule.⁹

Example with real numbers

How to compare two accounts using their disclosures

An example in words; fill in each row with what each institution's disclosure says.

Monthly fee

How much it is and what conditions waive it

Minimum balance

How much you have to keep in the account

Overdraft and insufficient funds

What they charge and whether you opted in for debit and ATM

Other fees

Dormant accounts, returned checks and other services you would use

What you would pay in a year

Add up the fees you would actually use, for each institution

Banks and credit unions must give you these disclosures before you open the account.⁵⁶ Debit and ATM overdraft fees apply only if you opted in.⁷ What you save on fees can go into your savings plan.

Run it with your numbersDown payment savings plan

Opening an account with an ITIN, passport or matricula

According to the FDIC, to open an account you bring your Social Security number or ITIN and an ID such as a driver’s license, a state or military ID, or a passport; some banks accept other IDs. Many banks let you open an account even if you are not a citizen, with a foreign passport, a consular ID or an ITINITIN (Individual Taxpayer Identification Number)An ITIN is a nine-digit number the IRS, the federal tax agency, issues to people who need a U.S. taxpayer identification number to file taxes and are not eligible for a Social Security number. It is for tax purposes only: it does not authorize you to work in the United States, does not qualify you for Social Security benefits or the Earned Income Tax Credit, and says nothing about your immigration status. You apply with Form W-7, and it expires if it goes unused for several years. Some lenders accept an ITIN for a mortgage.See the full definitionClose. And you may be able to open one with as little as $25.¹⁰

The federal customer identification rule for banks says that, for a non-U.S. person, the identification number can be a taxpayer identification number, a passport number and country, an alien ID card number or the number of another government document showing nationality or residence and bearing a photo.¹¹ Some banks accept other IDs, so ask before you go.¹⁰

In a legal opinion, the NCUA said it saw no legal impediment to a federal credit union lending to members who use an ITIN and a matricula consularconsular ID cardA Matricula Consular is an official Mexican government ID document issued by Mexico's consulates in the United States. Other countries offer similar IDs, sometimes called consular identification (CID) cards. According to the CFPB, many banks require a U.S. or state government-issued photo ID; if you do not have one, some banks and credit unions accept foreign passports and consular IDs such as the Matricula, but not all, and the CFPB suggests asking first. You usually also need another document, such as a bill with your name and address, and an interest-bearing account requires an SSN or ITIN.See the full definitionClose instead of a Social Security number, although the credit union must address the risks. It also said it knew of no law that prohibits a creditor from reporting borrower data to credit reporting agencies by a number other than the Social Security number. The question involved a plan to help members without a Social Security number establish a credit historycredit historyYour credit history is the record of your credit accounts and of whether you paid them on time, as shown in your credit report. Credit reporting companies collect and update this information and provide it to other businesses, which use it to make decisions about you. A good history helps you get housing, bank accounts, cards and loans, and lowers the interest you pay. If you have no history, or very little (a thin file), there may not be enough information to produce a score. Paying with a debit card, cash or a prepaid card usually does not build it.See the full definitionClose.¹²

The guide to opening a bank account without a Social Security number explains what to do if you are denied an account, and the Bank On low-fee accounts guide shows low-cost accounts. If you send money to family abroad, the remittance tax guide explains how it applies depending on how you pay.

Small-dollar loans and CDFIs

PAL loans. Federal credit unions may offer paydaypayday loanA payday loan is, according to the CFPB, a small, short-term, high-cost loan that is usually due on your next payday. To collect, the lender usually asks for a post-dated check or permission to take the money from your account. It generally does not check whether you can repay it and still cover your other bills. Its fees, expressed as an annual percentage rate (APR), can be much higher than a credit card's. Some states do not allow payday loans or cap them, and in others you may be offered a rollover in which you pay only the fees.See the full definitionClose alternative loans. For PAL I, the NCUA’s rule sets conditions including: $200 to $1,000; a term of one to six months; no more than three in six months to the same person and one at a time; no rollovers; fully repaid in installments; membership for at least one month first; and an application fee that reflects actual costs and never exceeds $20.¹³ Not every credit union offers them: ask yours.

CDFIs. A CDFICommunity Development Financial Institution (CDFI)A CDFI (Community Development Financial Institution) is an organization whose primary mission is community development. It provides loans, investments and other financial services in low-income communities and to people who lack access to financing. It can be a community development bank or credit union, or a loan fund that is not a bank. The law requires that it not be a government agency, that it be accountable to the community it serves and that it offer services such as financial and credit counseling along with its loans. The Treasury Department's CDFI Fund certifies them.See the full definitionClose (Community Development Financial Institution) is an organization certified by the Treasury’s CDFI Fund that provides financial services in low-income communities and to people who lack access to financing. It can be a community development bank or credit union, or a loan fund. There are certified CDFIs in all 50 states, the District of Columbia, Guam and Puerto Rico, and the Fund publishes the list. Its awards finance, among other things, mortgage lending for first-time homebuyers.¹⁴ The ITIN mortgages guide explains what to ask if you plan to buy a home.

If this is you

You have an ITIN or your home country's passport

Many banks open accounts with a foreign passport, consular ID or ITIN; ask which ones they accept.¹⁰

You have no credit history

The NCUA saw no impediment to a federal credit union lending with an ITIN and reporting your payments under that number.¹²

Someone in your family is already a member

Most credit unions let members' families join.¹

You need a small loan or help in your community

Ask about PAL loans at federal credit unions¹³ and look for a CDFI on the CDFI Fund's list.¹⁴

If you have a problem with your bank or credit union

First try to resolve it directly with the institution. For a credit union, the NCUA recommends exactly that; if it is not resolved, its Consumer Assistance Center (CAC) helps resolve disputes with credit unions, and when it can help, it asks the credit union to try to resolve the complaint within 60 calendar days.¹⁵ For questions about deposit insurance at a bank, the FDIC answers at 877-275-3342.⁴

If you want to get your accounts, credit or budget in order before buying a home, a HUD-approved housing counselorHUD-approved housing counselorA HUD-approved housing counselor works at an agency HUD has approved to provide housing counseling: independent, expert advice customized to your situation about buying a home, renting, a missed mortgage payment, a foreclosure or credit problems. The agencies usually charge little or nothing; many serve in Spanish and offer the homebuyer education course several assistance programs require. They are not lenders or real estate agents and sell you nothing. Your county page lists the official agencies with phone numbers.See the full definitionClose gives independent advice, often for free or at low cost.¹⁶

Mistakes that cost you money

• Mistake: Assuming every credit union is federally insured.

  Instead: Look it up in the NCUA's Credit Union Locator: some state credit unions have private insurance.³²

• Mistake: Thinking insurance covers investments or cryptocurrency.

  Instead: It covers only deposits; investments are not insured even if your bank or credit union sells them.⁴³

• Mistake: Opting in to overdraft without reading what it costs.

  Instead: Debit and ATM overdraft fees apply only if you opt in, and you can revoke your consent.⁷

• Mistake: Opening the account without asking for the fee disclosures.

  Instead: Ask first: banks and credit unions must give them to you.⁵⁶

• Mistake: Taking a payday loan without asking your credit union.

  Instead: Ask whether your federal credit union offers PAL loans, with limits on amount, term and fees.¹³

What to do this week

1. Write down where you live, work, study or worship, and any family members who already belong to a credit union.¹
2. Look up each institution you are considering in the FDIC’s BankFind Suite or the NCUA’s Credit Union Locator.⁴³
3. Ask for the fee disclosures for two accounts and compare them line by line.⁵⁶
4. Ask which IDs they accept if you have an ITIN, a passport or a matricula consular.¹⁰
5. Decide whether you want the overdraft service for debit and ATM transactions.⁷
6. Use the savings plan to set a monthly goal for your new account.