Banks, Credit Unions & Savings Institutions

Bank and Saving Institute SignAmerican banks offer a smorgasbord of investment options. From commercial and savings banks to credit unions and trust companies, consumers have a dizzying array of choices for saving and borrowing money.

Lending institutions vary in structure and purpose. Some, like the large national banks, lure customers with menus that allow customer to not only deposit savings and write checks, but also invest in stocks and borrow for auto loans, mortgages, and personal and small business loans.

Smaller institutions often promote personal services and higher yielding investment products to attract business, but also offer a variety of lending options.

Almost all are backed by the Federal Deposit Insurance Corporation (FDIC), created by Congress in 1933 to protect consumers and their deposits.

What is a Commercial Bank?

Commercial banks are for-profit businesses that take deposits and make loans, paying interest on the deposits and lending money at higher rates to consumers and businesses.

Shareholders typically own banks and choose theirs boards of directors. Banks operate under charters and report to both state and federal regulators.

National banks, which have the word “National” or initials “N.A.” in their names, report to the federal Office of the Comptroller of the Currency. State banks are chartered, regulated and supervised by state banking divisions. In addition, the FDIC regulates state banks that don’t belong to the Federal Reserve System and insures deposits up to $250,000.

Commercial banks offer a variety of services. Some have brokerage divisions, allowing customers to invest in stocks. Others operate trust companies, or divisions, that assist in managing personal or business trusts.

The banks charge fees for these services, so customers should compare several institutions to learn what each offers and at what cost.

What is a Thrift?

Thrifts, also called savings banks or savings and loan associations, once specialized in savings accounts and real estate loans. Today, they offer many of the same services as commercial banks, including checking accounts and both business and personal loans.

Thrifts can be either state or nationally chartered. Some issue publicly traded stock, while others are mutual organizations owned by their depositors. There are some structural differences between savings banks and savings and loan associations but usually few differences in the sorts of loans or investments opportunities they offer.

The U.S. Office of Thrift Supervision regulates federally chartered thrifts as well as many state-chartered ones.

What is a Credit Union?

Credit unions are different from traditional banks in that they are non-profit, cooperatively-owned institutions that take deposits and make loans.

Account holders are considered members of the credit union and deposits are seen as “buying shares” in the credit union. Customers must meet specific credit union qualification criteria to join, often based on affiliation with a business, union or group.  These members are paid dividends on the credit unions’ earnings, much as shareholders are paid dividends on a company’s stock earnings.

Because credit unions generally have fewer customers and fewer employees than banks, the interpersonal connections between the two are often stronger than those in banks. And credit unions often offer higher interest rates to depositors and lower loan rates to borrowers than their commercial counterparts.

Credit unions can be both federally and locally chartered and are federally insured. They are exempt from federal taxes and place various restrictions on membership. Though members once were required to share membership through work or religion, many credit unions now are open to people who live or work in geographical areas.

Congress created the National Credit Union Administration to charter, regulate and supervise federal credit unions. The NCUA also insures deposits of up to $250,000 in both federal and state credit unions.

What is an Online Bank?

Online banks resemble other commercial banks but lack physical branch offices. When online banking debuted as a feature of the internet age, it was touted as an alternative that offered higher deposit and lower loan rates. As mainstream banking has increasingly moved online, the rate gaps have narrowed.

Among widely recognized online banks are Ally Bank, Bank of the Internet and Simple Bank.

In additional to favorable rates, many online banks dispense with requirements like minimum checking balances. But for those who use ATMs frequently, costs can rise since most internet banks don’t own their own machines, forcing customers to pay out-of-network charges to other banks.

What are the Different Types of Accounts?

Savings accounts are often the first accounts many people ever have. Children often open savings accounts under parental supervision to deposit gifts and allowances. Adults use savings accounts to store emergency funds or park money that they expect to need in the near term. Savings accounts typically pay interest, though in recent years returns have been negligible. In many cases, banks limit the number of withdrawals customers can make from savings accounts, and they don’t link the accounts to debit cards.

Checking accounts are often used for basic cash-flow. They deposit wages into them and pay bills from them. Checking accounts allow customers to write paper checks and make payments online. They also usually offer debit cards, allowing customers to withdraw funds from ATMs and transact purchases. Some checking accounts pay interest, while many impose significant fees for no-no’s like failing to maintain a minimum balance or writing overdrafts.

Money market accounts pay somewhat more interest than either savings or checking accounts. Typically, they come with substantial average balance requirements. They are a good place to deposit funds in excess of $5,000, and can often be linked to checking accounts so that money can be moved when needed.

Certificates of deposit (or CDs) pay more than other types of accounts with a caveat: They require a commitment not to touch the deposited funds for a fixed amount of time. In general, the longer the term of deposit, the more interest the CD earns. When interest rates are low or falling, this can be a significant advantage, but when rates paid on deposits are increasing, the opposite can be true. If CDs are cashed in early, all or part of the interest they earned is often forfeited. In some cases, banks might not even permit early withdrawals. Check the terms before investing.

What is the Right Financial Institution for Me?

If convenience and accessibility in person and online are top priorities, a bank is the safest bet. Commercial banks also generally offer a greater range of services than other financial institutions.

The largest banks offer local branches and ATM services throughout the country and might have connections abroad for international travelers.

Credit unions, on the other hand, are smaller and may have fewer ATMs or branches. In fact, this type of a financial institution usually focuses on one geographic area, so it can be harder to access funds when outside of that area.

Customers often say credit unions offer better service than commercial banks. Credit union employees work for their members, so customers are the top priority. Commercials banks, especially the very large ones, are cutting back on branch offices, turning instead to online and telephone services. Smaller credit unions are less likely to use complex voicemail trees or use automated email than their competitors. For customers uncomfortable with the move to online banking, credit unions offer an alternative.

Credit unions often pay higher interest rates on deposits than their for-profit rivals, a benefit of returning surplus earning to the business. The not-for-profit structure can also mean lower fees and free checking without the restrictions commercial banks impose.

A big difference between for-profit banks and their credit union rivals comes in the loan department. Credit unions, which are membership organizations, often have less red tape for borrowers than commercial banks, which tend to be large and bureaucratic. And credit unions can often afford to charge less interest on loans than their profit-driven counterparts.

A savings bank can a better bet for mortgages and other real estate services as these were the category’s historic specialties.

If you want to consolidate debt, banks and a credit unions are equally useful. Banks may offer more options, but credit unions are often more likely to lend.

Finally, potential customers should ask themselves questions before deciding on a financial institution to use. First, honestly assess your financial needs and abilities. Are you a customer with big money to deposit, or do you spend most of your income as it comes in?

If you plan to spend most of your deposits right away and maintain a small balance, look for institutions and account types with lower balance requirements. Often this means higher fees, but those also vary.

Visit several banks’ websites and compare their fee schedules. Fees and charges can pile on quickly if you don’t play by the rules, so if you’re likely to maintain a small balance, find a bank that accommodates that.

Conversely, if you have $100,000 to deposit and no short-term need to withdraw it, look for institutions that offer jumbo CDs. If you have more than $250,000 to park, find ones that offer insurance protection that exceeds the FDIC’s.

Also consider interviewing a bank’s branch manager before making a choice, and educate yourself on what banks don’t tell you. A cooperative and engaged manager often has the power to negotiate lower fees and pay higher yields. Online banking can also lower fees, so study the banks fee schedules.

Consider bundled accounts. Many banks offer special deals to customers who maintain several accounts, or who have both loans and deposits with their institutions. Look at the offerings before you decide.

And always read the fine print before you enter in contracts with banks. Banks often include language that requires disputes must be settled through arbitration instead of jury trials. That might not sound like a big deal until it is, so understand the terms.

Bill Fay

Bill Fay is a journalism veteran with a nearly four-decade career in reporting and writing for daily newspapers, magazines and public officials. His focus at Debt.org is on frugal living, veterans' finances, retirement and tax advice. Bill can be reached at bfay@debt.org.

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