The difference between banks and credit unions

Banks and Credit Unions are both financial institutions that provide financial services, however several differences distinguish the two types of financial organizations. This article will discuss the difference between banks and credit unions in terms of four key areas 1) regulatory bodies, 2) primary interests, 3) deposit insurance, and 4) financial services. It will become clear through illustration of these differences, that banks and credit unions are indeed quite different from one another, and that different advantages and disadvantages stem from these differences.

• Regulatory legislation and agencies

Credit Unions are regulated by the Federal Credit Union Act of 1934 in addition to some shared regulatory legislation with banks such as the Fair Credit Reporting Act and The Depository Institutions Act of 1982. However, banks are regulated by the Federal Reserve Board and the Federal Deposit Insurance Corporations which credit unions are not. Moreover, credit unions are regulated by the National Credit Union Association (NCUA) , whereas banks are not. Some federal agencies and supervisory organizations such as the Office of Comptroller of Currency (OCC) and ,the Securities and Exchange Commission (SEC) may oversee aspects of both bank and credit union operations. Laws governing both U.S. banks and credit unions are codified in Title 12, of the U.S. code.

• Shareholder profit vs member ownership

The primary interests of a bank or credit unions are those parties who's objective(s), the financial institutions represent. For banks, the shareholders and owners are both influential and an important interest be they private or public, Credit Unions on the other hand are member owned and thus the members' interests are of primary interest. This is not to say there are no additional interests in these financial institutions as there may be administrative, employee, regulatory and commercial interests as well. However, since these latter interests may be common to both banks and credit unions, the difference in ownership interest is a more distinct difference of interest.

• Federal deposit insurance

A second difference between banks and credit unions are in how they are insured, and regulated. Bank deposits are insured by the Federal Deposit and Insurance Corporation (FDIC) whereas Credit Union deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF). Both these organizations are Government chartered to protect both confidence in financial service institutions and the public's money through deposit insurance. Currently, in 2010, this insurance protects up to $250K of deposits for each account for both banks and credit unions; however this amount was originally intended revert back to $100K of insurance following the fallout from the 2008 financial crisis.

• Scale of financial services

Banks generally have greater legal, service, and financial scope. The financial services offered by banks and credit unions are largely the same, however the policy regarding these services can be quite different between the two due to the primary interests. Since banks are more concerned with profiting owners, bank members may be subject to more penalties, more service fees or surcharges, and higher interest rates whereas credit unions are more concerned with benefiting members who's interest is not paying more than they need to for services and financing. For example, a bank may charge for use of online banking and bill pay whereas a credit union may not if it can remain financially solvent and functional without such fees.

The difference between banks and credit unions can be good and bad for consumers. For banking clients, the number of service options, bank products and access to financing is generally higher, albeit mostly at a higher cost. However, credit unions are efficient and affordable for small loans, cash deposits and basic financial services. Many credit unions are also smaller and have members who often share a common interest such as place(s) of employment, and industry affiliation. In other words, credit unions are more individually, occupationally, and member focused whereas banks may be more commercially, profit and economically orientated.

How much debt is too much?

One of the most important aspects of debt management is one's ability to repay it. If one has considerable assets and savings in addition to an income more debt can be comfortably taken on than someone who has an income and no savings. Thus one should not only consider the ratio between debt and income but other financial indicators. What's more, when a business or individual is experiencing fast financial growth it can be beneficial to take on more debt as this assists in the growth process and is based on anticipated earnings in the future.

When considering how much debt is too much consider things like mortgage, car loans, credit cards, medical bills, student loans, margin accounts and/or any other loans. Consulting money management resources such as the Federal Trade Commission for additional guidance is also helpful. Add to these other expenses such as daily living expenses such as insurance, utilities, food and entertainment. They all add up and one should know exactly how much money is available every month to pay these financial obligations. When the bills outweigh the resources, financial despair may soon be at hand. A few factors to consider when taking on debt are as follows:

• Confidence of debt in relation to future income and financial performance
• Comfort level of debt as considered in relation to assets, expenses and income
• Capacity to pay back debt in a hurry and finance an emergency should such a situation emerge

Assuming one is aiming for some debt to improve life goals or business performance, several key factors should be considered when taking on any kind of debt and are included as follows:

• Income level and stability
• Debt interest rates
• Asset taxation
• Opportunity cost of debt
• Benefits of debt

The more steady and higher one's income the better equipped one is to handle debt to a certain level. If the debt's interest rates are too high the amount owed may compound monthly causing the total annualized debt to rise. What's more, if one's assets, especially those purchased using debt have high levels of taxation, the amount to disposable income one has around tax time may go down. In this case think twice before financing a larger home, luxury automobile or boat.

Also of relevance is opportunity cost; if a financial obligation requires one to invest time and energy such as in the case of student loan debt, professional training or certification is the lost time working worth the debt taken on? Naturally, this leads us to the benefits of debt. With debt one may improve one's life, but the potential is also there to make one's life more stressful as payments may just be too high.

Debt is often encouraged by banks and businesses because it means more money for them, with the partial exception of business loans. All one has to do is pass a credit check and it is a green light to hand over a piece of one's financial life to another person or organization. Proper debt management can facilitate professional growth, increased income and a higher standard of living,  however it is also wise to balance loans and interest accrued on those loans against things like income, interest rates and taxation.

Deciding how much debt is too much is a personal choice. Debt is somewhat of a subjective term because some people feel more comfortable with it than others. So it is important to know how much debt one is willing to risk. Having said that there are several concepts to consider once one has agreed to take on debt of any kind.

While comfort with debt is an important factor there are also several other variables a debtor should consider as well. When deciding the ideal debt to income ratio for oneself, it may be helpful to consider the information presented in this article. Debt can pay off better than one anticipated, but it can also be a pitfall if used unwisely or incorrectly.