Choosing the Best Banking Option for You
When talking about Banking, people generally group Banks, Credit Unions, and Savings & Loan companies all in one group. They do provide similar services, but they each have specific differences that might make one a better fit for your financial needs than another.
What They Have In Common
All three of these institutions can do all the things you would normally associate with a “bank” – opening checking and savings accounts, making commercial loans, and issuing residential mortgages.
Savings and Checking Accounts
When you deposit cash at a bank, credit union, or savings and loan, you will put it into a checking (also called “Current”) account or a savings account.
Savings Account
Savings accounts are usually the first type of bank account you might open as a child. This is an account where you can make deposits of cash, and earn interest. How much interest you earn can vary a lot based on how much you have saved, how often you withdraw, the overall market interest rates, and even just by institution.
Savings accounts pay interest because banks use the money you have deposited to make loans to others, including people and businesses. Because the banks are “borrowing” your money, you receive interest in return. The larger your balance, the higher the interest rate you will be offered. Most savings accounts come with a limited number of withdrawals you can make each month. If you tend to withdraw money from a savings account frequently, the bank has a harder time maintaining that cash balance necessary to make loans to others, so you could be charged a penalty for making more withdrawals. If you need more frequent access to your money, a checking account is better for you. Credit Unions generally specialize in savings accounts.
A savings account is a deposit account held at a bank or credit union that typically pays interest on the money you keep in the account. At an FDIC-insured bank or federally insured credit union, eligible deposits are generally insured up to $250,000 per depositor, per institution, per ownership category. Banks use FDIC insurance, while credit unions use NCUA share insurance.
Savings account terms vary by institution. Interest rates, minimum deposits to open an account, minimum balance requirements, and monthly maintenance fees can all differ, so consumers should compare these features before choosing where to save.
Money Market Accounts
A money market deposit account is similar to a savings account but may offer different interest rates, minimum balance requirements, fees, and access to funds. Some institutions require a larger minimum deposit or balance, while others may offer a higher interest rate or more convenient access to cash.
Money market deposit accounts at FDIC-insured banks and federally insured credit unions are generally covered by federal deposit insurance, subject to applicable limits and ownership rules. Terms vary by institution, so compare the rate, fees, minimum balance, and withdrawal features before opening an account.
Certificates of Deposit (CDs)
A certificate of deposit (CD) is a deposit account where you agree to leave your money with a financial institution for a set period of time, often ranging from a few months to several years. In exchange for giving up some access to your money, CDs often pay a higher interest rate than regular savings accounts.
CDs may require a minimum deposit and typically do not charge a monthly maintenance fee, although withdrawing money before the term ends may result in a penalty. Eligible CDs at FDIC-insured banks and federally insured credit unions are generally protected by federal deposit insurance.
How Consumers Choose Where to Save
The best place to keep savings depends on how much money you have, what you are saving for, and when you expect to need the money. Consumers should compare the tradeoffs among savings accounts, money market accounts, and CDs.
Broader PESTEL factors can also influence saving decisions. Political and legal changes can affect banking rules, economic conditions can affect interest rates, social trends can affect how people prefer to bank, technology can change how quickly accounts can be accessed, and environmental events or policies can affect financial decisions.
| Product | Typical Minimum | Access to Cash | Typical Rate Trend | Federally Insured? |
|---|---|---|---|---|
| Savings Account | Often low or none | High | Usually lower | Yes, when held at an insured bank or credit union |
| Money Market Deposit Account | May be higher | Generally accessible | May be higher than basic savings | Yes, when eligible |
| Certificate of Deposit | Varies; may require a larger deposit | Limited until term ends | Often higher in exchange for locking funds | Yes, when eligible |
The best option depends on your savings goal, time frame, need for access to cash, and willingness to accept restrictions in exchange for a potentially higher return.
Checking Accounts
Checking accounts are where you store your “day to day” money, meaning you will have a lot of frequent deposits and withdraws. Your checking account is the account that gets drawn down when you write checks, use a debit card, and usually where you pull money from when you use an ATM.
If you are accessing your account frequently for deposits and withdrawals, then you want to use a checking account. Consider a checking account where you store your “day-to-day” money. When you write a check, use your debit card, or withdraw money from the ATM, your checking account is usually the account that the money is drawn from.
FDIC and NCUA Insurance
All of these types of financial institutions can offer federal deposit insurance. For FDIC-insured banks and Savings & Loans, it is provided by the FDIC (Federal Deposit Insurance Corporation). For federally insured credit unions, it is provided by the NCUA (National Credit Union Administration). These federal insurance programs protect eligible deposits up to applicable limits if an insured financial institution fails.
Federal and state regulation also affects where consumers choose to save. Agencies supervise banks and credit unions, establish rules designed to protect consumers, and help promote stability in the financial system. FDIC and NCUA insurance provide an additional layer of protection by covering eligible deposits if an insured institution fails.
Why Some Accounts Are Not Federally Insured
Not every place that lets you store money is a federally insured deposit account.
Mobile payment and FinTech apps are often operated by nonbank companies. A balance held directly with a nonbank company is not automatically FDIC-insured simply because the app works with a bank. In some cases, funds may qualify for pass-through insurance after they are deposited at an insured bank and certain recordkeeping and ownership requirements are met. FDIC insurance does not protect you against the failure of the nonbank company itself.
Stock and investing apps usually involve brokerage accounts rather than bank deposit accounts. Stocks, bonds, mutual funds, and similar investments are not protected by FDIC deposit insurance. Some brokerage accounts may instead have SIPC protection if the brokerage firm fails and customer assets are missing, but SIPC does not protect against investment losses caused by falling market prices.
Crypto exchanges and wallets are also different from insured bank deposits. Crypto assets themselves are not protected by FDIC insurance, and losses caused by the failure of a crypto company or decline in the value of crypto may not be recoverable through federal deposit insurance.
For more information about how cryptocurrencies work and the risks involved, see What are Cryptocurrencies? (017).
Commercial Loans
A “Commercial Loan” is a loan made to a business, usually to “start up” or to expand their operations. Banks, Savings and Loans, and Credit Unions differ a lot on how much of their business comes from commercial loans, but for small businesses looking to secure start-up loans, each institution might be a good choice. Banks and credit unions use deposits from savers as part of the funding they use to make loans not only to individual consumers, but also to businesses, nonprofit organizations, and governments.
Residential Mortgages
A residential mortgage is a loan acquired from a financial institution in order to purchase a home. A residential mortgage is necessary for most new homeowners because of the dollar amount required to purchase the home (usually over $100,000 and sometimes over $1 million). Since the mortgage amount is large, the borrower(s) make payments over a long period of time, usually 25-30 years. Savings and Loan institutions generally specialize in offering residential mortgages.
What is the difference between Banks, Credit Unions, and Savings and Loans?
Despite offering some similar services, there can be huge differences between these three types of financial institutions.
Banks
Banks are for-profit corporations with a charter issued at the local, state, or national level. They issue stock which is owned by investors, and those investors elect a board of directors who oversee the bank’s operations. Banks generally specialize in commercial loans – making loans to businesses to help them get started or expand.
Local banks are becoming less common, while national banks are becoming a lot more common. Over the last two decades, many local banks have been bought or merged with State banks, who in turn were bought or merged with National Banks. This has some advantages – by using a national bank, you will have access to a bank branch, ATMs, and in-person account services in a lot more locations than smaller institutions. Larger banks generally offer more account management services and account types than other institutions. For example, a national bank might offer some types of checking accounts that offer points and rewards for certain types of purchases (like gas and groceries).
Because they are much larger, banks also generally have better online banking services, with more account management services. This includes things like transferring money between your checking and savings accounts, viewing the checks you have previously written, checking balances using mobile apps, opening and closing credit cards, and managing automatic payments and deposits. Banks will also generally offer more choices for residential loans as well.
When using these electronic financial services, both you and the bank have legal responsibilities. The bank is responsible for securing your data and investigating unauthorized transactions. As a consumer, you are responsible for protecting your passwords and promptly reporting any suspicious activity on your account.
There are some significant drawbacks as well. Banks generally have higher fees than other institutions for its services, with lower interest rates for savings (although this is not always the case). It is fairly rare to find truly “free” checking accounts at banks. The large amount of choice you have for your savings and checking accounts can be a drawback as well – if your life circumstances change from what they were when you first opened your account, you might end up with more fees and less benefits than with a different account type, but very few people consider changing very often.
Credit Unions
Credit Unions are the financial opposite of banks – they are non-profit, almost exclusively local, and are owned by the people who make deposits. Every member who makes a deposit at a credit union is a part-owner, and can vote on issues relating to the institution. They can also get elected to be the managers of the credit union.
Credit unions specialize in savings accounts and making short-term loans. Since they are non-profit, all the profits made by these loans are given back to the credit union’s depositors as dividends.Many depositors also prefer credit unions because of the more personalized service they receive. This is because credit unions are almost exclusively local, relying on the client’s deposits to stay in business, so they often have a reputation for providing excellent customer service. Since they are smaller with lower management costs, credit unions will often offer better savings account rates than banks and checking accounts with free services.
Savings and Loans
Savings and Loan institutions focus strongly on residential mortgages. In fact, by law they need to invest 65% of their assets in residential mortgages, and only up to 20% in commercial loans. They can also be local or national (like a bank).
A Savings and Loan can be organized like a bank (owned by investor shareholders) or like a credit union (owned by the depositors), but it is always a for-profit institution. Specializing in residential mortgages means that you might find the most flexibility for your mortgage at a Savings and Loan, and their smaller focus means that you will often see better terms for mortgages here than elsewhere (but not always!).
Savings and Loans do suffer from some of the same problems as credit unions. Their emphasis on slow-maturing mortgages means they are often lagging behind banks with account management and online services.
Choosing the Right Financial Institution
When comparing banks, credit unions, and savings and loan institutions, consider:
- Interest rates paid on savings
- Account and service fees
- Minimum deposits or balances
- Deposit insurance and other risks
- Branch and ATM locations
- Online and mobile banking convenience
- The institution’s reputation and customer service
- The products and services you expect to use
There are often tradeoffs. For example, an account offering a higher interest rate may require a larger minimum balance, while an institution with lower fees may have fewer branches or digital features. The best choice depends on which features matter most to you.
How FinTech Changed Investing Access
Investing used to involve more barriers for individual investors. Brokerage commissions could be expensive, accounts often required larger minimum balances, financial information was less accessible, and buying or selling investments usually required more time and effort.
Financial technology, or FinTech, has lowered many of these barriers. Many brokerage platforms now offer zero-commission trading for certain investments, low or no account minimums, mobile investing apps, fractional shares, and free or low-cost research tools. These changes have made investing more accessible to people with different income levels and levels of financial knowledge.
Greater access does not eliminate risk. Investments can still lose value, some products may not be appropriate for every investor, scams can appear through financial apps and online promotions, and easy access to trading can encourage excessive trading or impulsive decisions.
For more information about comparing brokerage firms and choosing an investment account, see Finding the Right Brokerage Account.
Alternative Financial Services vs. Banks and Credit Unions
Not every financial service provider works like a bank or credit union. Some alternatives provide fast access to cash or credit, but they may come with higher costs or fewer protections.
Check-cashing businesses provide immediate access to the cash value of a check in exchange for a fee. Pawnshops make loans secured by personal property, which means the borrower can lose the property if the loan is not repaid. Payday and vehicle-title lenders provide short-term loans that can be expensive and may lead borrowers into repeated borrowing or debt cycles.
By comparison, insured banks and credit unions offer deposit accounts protected by federal deposit insurance and often provide lower-cost options for routine banking and borrowing.
For more information about high-cost short-term borrowing options, see What to Do When You Need Money Fast.
Consumer Protections
Following the 2008 financial crisis, the Dodd-Frank Wall Street Reform and Consumer Protection Act strengthened oversight of parts of the financial system and created the Consumer Financial Protection Bureau (CFPB). The CFPB focuses on consumer financial products and services and has authority involving consumer complaints, supervision, and enforcement of federal consumer financial laws.
Consumers can submit complaints to the CFPB about certain financial products and services when they are unable to resolve a problem directly with a company. For broader information about consumer agencies, complaints, and remedies, see Protect Yourself as a Consumer.
Who Regulates What?
Different financial institutions and services are supervised under different sets of rules. State banking departments may charter and supervise banks and credit unions operating under state authority, while federal agencies also play important roles.
The FDIC insures qualifying deposits at insured banks, while the NCUA provides similar protection for qualifying deposits at federally insured credit unions. The CFPB enforces federal consumer financial protection laws and works alongside other federal and state regulators.
FinTech payment apps, brokerage apps, and crypto platforms may operate under different regulatory frameworks from traditional insured deposit accounts. Because of these differences, consumers should understand both what type of account they are opening and what protections apply to it.
Challenge Questions
- Based on your current income (or future) income from a part-time job while in high school, explain which financial institution would be the best fit for you. Include at least three reasons why you would make that choice.
- Your uncle wants to start his own business but needs to borrow money in order to do that. What advice would you give him about the type of financial institution most likely to work with him?
- You have your first part-time job and are working 20 hours per week. Your parents have asked you to be responsible for paying for your cell phone bill, your car insurance, and for putting gas in the car. They would also like you to start saving for college expenses. Explain how you would use a savings account and a checking account to help manage your finances.
- List 3 National Banks, 3 Credit Unions and 3 Savings and Loan Institutions near your home.