After entering our adult life, we have to manage our own finances. Financial literacy plays a big role in deciding our lifestyle in the long run. Some people hardly make ends meet even after earning a handsome amount. Reason being, lack of knowledge about savings and investment. A lot of these financial decisions start with choosing the right bank to put your money in.
Most of us opt for traditional banks, because that’s what we have seen our parents do. But the trend is changing now, people are opting for credit union banks. To make an informed decision about whether to go for traditional banking or a credit union bank, you need to learn the basics of how they function and differ from each other. So let’s learn about these banking systems, so that you can manage your finances better.
What is Credit Union Bank
A credit union bank has a community based approach. Unlike traditional banks, owned by the stakeholders. Credit union bank are more like a member-owned community bank, owned by the people who use it. When anyone opens an account, they become a member and part-owner. Profits are returned to members in the form of lower fees, better interest rates on savings, lower loan rates. The main focus is always on helping members, not maximizing profit as there are no stakeholders involved.
What is Traditional Bank
Think of a traditional bank as a business owned by investors. Its main goal is to make profit for shareholders. Customers are just customers. Profits go to owners, not directly back to customers. When the main goal is to serve the interest of stakeholders, customers often suffer in the form of higher fees and lower interest on savings.
How Credit Union Bank Work
As there are no stakeholders involved, one might wonder how credit union banks work. They work just the way any community service would work. They often serve a specific group (local community, workers of a company, military, etc).
People from the community pool their money together. This pooled money is used to make loans to other members, pay operating costs. Instead of relying on outside investors, member fund members. Members can borrow money just like in a traditional bank, but the benefit here is that interest rates are much lower and approval is more flexible. Even when these banks make profit, the extra money would still go back to the members in different ways.
Which Bank is Best for You
In order to choose the right banking system for you, you have to analyze your affordability, how much ease of transaction you want, and what are your long term financial plans. With a traditional bank, you can manage big transactions easily, whether national or international. Whenever charges are higher, there is more convenience. So naturally traditional banks offer greater ease.
But when we look purely from a customer and affordability perspective, credit union bank seems like the more viable option. The community based system mostly favours members, as there is no outsider party involved. Credit union banks are an affordable option for long term financial planning. You get to invest less and save more.
Conclusion
To sum it up, a traditional bank works to make money for investors, while a credit union works to save money for its members. Both have their pros and cons, but it’s important to have proper knowledge about their working systems, so that you can choose the best one according to your financial needs.