To make smart choices about your finances, you need to understand how banks and credit unions work. With this knowledge, put them to work for you and build a secure financial future.

Your financial well-being depends heavily on a healthy balance of spending, saving and investing. When it comes to finances, however, many are hesitant because it’s not an area of expertise. In any position where choices need to be made, knowledge is power. In order to make informed decisions about your money, you need to understand how banks and credit unions work.

Banks and Credit Unions

When we talk about banking and where we need to start, our first thought is logically a bank. But, today we’re seeing more credit unions moving into communities. They operate similarly, providing many of the same products and services. They are equally adept at helping you meet your financial needs.

The key difference between the two is that a credit union is a not-for-profit institution owned by its members. Once you make a deposit, you’re a part owner and you have a say in the decisions they make. Banks are large corporations controlled by board members and owned by shareholders.

When most people think about banks, they think about savings accounts and checking accounts and loans. But do you really know what happens to your money when you take advantage of any of these bank products?

Savings Accounts

A savings account was likely your first introduction to the banking system. You saved birthday money, a few dollars from an after-school job, and eventually, a regular portion of your paycheck.

The bank pays you for keeping your money in a savings account in the form of interest. Unfortunately, since a savings account is flexible and you can withdraw money at any time, the interest is typically low.

In a credit union, a savings account works the same way, but the interest may be a little higher. That’s because credit unions choose to reinvest their profits. Most banks return their profits to their shareholders in the form of dividends.

Your savings account is a source of money for the bank to use to make loans to other customers. The bank charges the borrower a higher interest rate for the loan as compared to the interest they pay to your savings account. This allows them to collect a profit, too.

The credit union does the same. However, they do so in an attempt to only cover business expenses.

Woman depositing check through smart phone at table

Checking Accounts

Checking accounts act very much like savings accounts. You deposit money into your account, and the bank uses the funds to make loans or purchase securities for investment.

Most people deposit checks into their account in order to cash them. After the deposit, the bank encodes the amount onto the check and creates an electronic file of the check. The file is sent to a clearing house and then to the bank against which the check was drawn. There it’s matched to the customer who wrote the check. If there are funds in the account, you’re paid.

Today, you create the electronic file when you take a picture of your check and send it to the bank for processing through the bank’s smartphone application.

With debit cards tied to your account, you can withdraw money from an ATM, transfer funds, or buy something. Unlike a credit card, these funds are immediately deducted from your checking account.

Loans

Whether for cars, homes, or other reasons, banks loan money to customers, charging interest to be repaid over the term of the loan. The loan’s interest rate covers the deposits the bank borrowed from to make the loan to the customer. It will be high enough to result in a profitable transaction for the bank.

Credit unions don’t have to charge a high interest rate to turn a profit, because their goal is to cover business expenses. Generally, loans offered by a credit union are less expensive.

Whether it’s the bank or a credit union, be sure you’re working with a reputable financial institution. Understand the value of your credit score and the terms to which you are agreeing.

Predatory lenders market title loans or payday loans. They prey on consumers who are financially strapped and who fail to recognize they’re being taken advantage of. These types of loans and their terms can ultimately destroy your credit.

Be sure to make your loan repayments on time and in full. If not, you’ll be charged a late fee, which can be substantial. Defaulting on a loan can negatively impact your credit score and your ability to secure a loan in the future.

Man using cash machine.

Fees

A substantial amount of bank revenue comes from fees deducted from both your savings and checking accounts. ATM, overdraft, late payment, and penalty fees, are just a few you may be charged. These are avoidable charges that should be monitored and kept under control.

Ask! Ask! Ask!

Both banks and credit unions offer valuable products and services that can help you achieve your financial goals. It’s critical, however, to understand the:

  • Types of accounts you own and their purpose
  • Benefits they offer
  • Fees you pay

Most importantly, ask yourself if these products and services are worth your investment.

Every bank wants your money, so make them work for it. Ask questions until you’re confident you have enough information to make the right decision.