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How Are Credit Unions and Banks Different?

“Credit unions? Like Western Union?” I asked naively not too recently. The fact is that the only thing a credit union and Western Union have in common is their name. A credit union functions similarly to a bank, with the major difference being a credit union is a not-for-profit, member owned and operated business.

 

Credit Unions

Credit unions are more focused than banks in serving a particular community. There are many credit unions that are established for members of certain national origins, careers, or current residence. As a Canadian citizen, you have a right to join a credit union as a member. This requires purchasing a stock in the union, which could be as little as $5, or perhaps $25. Once you’re a member, you have access to all the traditional banking necessities, such as chequing accounts, savings accounts, mortgages, loans, and lines of credit. As a member with an account, you’re entitled to vote in the decision of who sits on the Board of Directors. You may also earn dividend income depending on the credit union.

The Board of Directors of a credit union is comprised of volunteers, and any member is eligible to run, so long as they meet their union’s guidelines. Since each union is allowed to make their own rules for running for the Board, it varies from one to another. Some credit unions advocate for retirees or young members to run, in order to contribute or gain experience, respectively.

 

Banks

Banks are large for-profit financial institutions that are not member owned or operated, nor do they require membership to invest in them. You’re probably already familiar with banks, as they are a near requirement for modern living. Many banks offer similar products, with the noticeable differences in fees, hours, and your own personal relationship with a branch’s employees.

As for investing, Canadian regulations also prevent any one person or group more than 20% of the voting shares (shareholders that are allowed to vote for the Board of Directors or on other major decisions) or 30% of the non-voting shares. This effectively prevents any of its investors from becoming too powerful within the company on their own.

 

Is My Money Safe in a Credit Union?

Deposits made at banks are protected by CDIC insurance up to $100,000 per person per insured category, so even if the bank fails, customers don’t lose their money. Bank failures are exceedingly rare – the last bank failure of a CDIC member institution was in 1996, of the Security Home Mortgage Corporation. Many customers feel comfortable that a Big 5 bank won’t fail, but the CDIC insurance is a nice boost of confidence.

Customers might not have such strong faith in credit unions, especially if they have been banking at larger institutions for their entire life. Since CDIC doesn’t insure credit unions, some may be concerned about their savings. However, every province does have a corporation that insures the deposits at credit unions much in the same way CDIC insures deposits at banks. Every province has a different insurance provider with different repayment terms in the case the credit union collapses, but some terms are even more favourable than CDIC’s. In Alberta, British Columbia, Manitoba, and Saskatchewan, for example, all deposits at credit unions are insured with no maximum.

Some of the terms that credit unions offer can be better than even the banks can provide. It comes down to where you feel most comfortable keeping your money. Many Canadians use the same bank as their parents, but only because they haven’t fully explored other options. Credit unions can save you money on banking fees, and earn you higher interest than banks. If you’re dissatisfied with your current bank, try looking at a credit union instead.


Chris Chris 01/26/2019
Canadian personal finance buff and all-around writing enthusiast, Chris loves breaking down complicated money ideas to show that they're really not so complex. 
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