Traditional Bank vs. Credit Union vs. Online Bank

Which is the best bank for you? It depends on which features you want the most.

Matthew Frankel, CFP
Matthew Frankel, CFP
May 19, 2015 at 7:16AM

When it come to choosing a bank, there are a few broad categories you can choose from, and each has its own pros and cons. The right type of bank for you depends on the services and features you find the most valuable. Here's a quick guide to some of the reasons you may want to switch to a different kind of banking.

Traditional banks: convenience is key
Traditional banks are by far the broadest category of all, and they comprise banks of all sizes -- from the "big four" (Wells Fargo, Bank of America, Citigroup, and JPMorgan Chase) to regional banks (such as Regions Financial and BB&T) to small, local banks.

The front door of a bank.

Image source: Getty Images.

Two of the biggest reasons to choose a traditional bank are technology and convenience. Generally, traditional banks invest more money than credit unions in technology, such as online and mobile banking systems.

Traditional banks are also the most likely to have a widespread physical presence, both in terms of ATMs and branches. Traditional banks, particularly the national chains, are generally the best choice for customers who value the convenience of being able to access their money and go to the bank no matter where they travel.

However, as we'll see in more detail later on, there are some downsides to traditional banks. The experience can feel impersonal, fees tend to be on the high end when compared to those of other types of banking institutions, and interest rates on deposit accounts tend to be low.

Credit unions: a more personal touch
For those who actually enjoy going to the bank and want a more personal banking experience, a credit union may be the way to go.

Perhaps the best reason to choose credit unions is that they generally charge lower fees and pay better interest rates on deposits than traditional banks do. Credit unions don't invest as much money in technology and other state-of-the-art features as traditional banks do, and they have a non-profit business model, so they don't charge customers any more than they need to. According to a study by WalletHub, the average checking account at a national bank will come with $77 in fees over the course of a year, while the average at credit unions is just $22.

In a credit union, the customers are the owners, with deposits technically representing "shares" in the credit union's business. In fact, operational decisions at credit unions are made by a group of volunteer board members (many of whom are elected by the credit union's members), not executives trying to put more money in their own pockets. As a result, decisions involving loan approval processes, fees, and other product details are made with the customers' (i.e., the owners') best interests in mind.

Four women use ATMs.

Image source: Getty Images.

Credit unions also offer a more personal experience, which can come in handy when you're trying to apply for a loan. At a traditional bank, the loan officer will generally run your credit and evaluate your ability to repay the loan -- on paper. On the other hand, credit unions tend to take a more personalized approach. Many credit unions get to know their customers (and local markets) more thoroughly and take a close look at loan applicants and their ability to repay, going beyond traditional indicators like credit score and pay stubs. In other words, a credit union is more likely to listen to your story when considering you for a loan.

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On the downside, many credit unions lack some of the conveniences that traditional bank customers take for granted. Credit unions generally have less money to invest in technology, so your credit union's "online banking" site might look stone-aged compared to, say, Wells Fargo's.

Credit union customers may also have limited access to ATMs. Some credit unions offer to reimburse foreign ATM fees but may restrict the benefit to a certain network. If having an ATM available on every other street corner is important to you, a credit union may not be the best bet.

Online banks: better interest rates trump convenience
Obviously, if you enjoy going to a bank or have a frequent need to conduct any of your banking in person, an online bank is not for you. For instance, my bank has a notary service for account holders that I use frequently, so I couldn't completely switch to an online bank. However, online banking offers some compelling benefits.

For example, online banks are "open" 24 hours a day, seven days a week. If you need to talk to an actual banker, most Internet-based banks have telephone service available anytime. And because they don't deal with the costs associated with operating a physical branch network, online banks generally offer the best interest rates on savings account and CDs, as well as lower fees.

The average savings account interest rate at a national bank is a paltry 0.03%, and even credit unions manage just 0.22%. However, it's not too difficult to find an online-based savings account that pays 1% interest or more.

Which is best for you?
What's the best option, then? There is no one-size-fits-all answer. Some people prefer the personal touch of a credit union, while others like the higher interest rates they can get from online banks. Still, some people simply can't give up the convenience of a traditional bank. It all depends on your personal needs and which features matter to you the most.