What is a Credit Union?
Credit unions are member-owned lending institutions currently serving 100 million people in the U.S. Focused on providing affordable services and good returns to everyone who joins, credit unions operate on a system in which the individuals support each other in achieving their financial goals. When money goes into a credit union, all members have the potential to benefit from the investment. Savings, withdrawals and loans create a balanced cycle of giving and receiving so that the financial needs of all members can be met.
Can I Join a Credit Union?
Most people can qualify for certain credit union memberships based on where they live, work, go to school, or worship – or based on what associations they belong to. Most credit unions will qualify an individual based on a family member's eligibility – so if you yourself don't qualify but your mother or brother does for example, you can become a member. Some qualifying associations are extremely easy to join; accordingly, many people will consider joining an eligible association simply to gain access to a credit union membership.
Field of Membership Requirements
Credit unions are required by law to have a “field of membership,” a specifically defined group of people they serve. The field's definition may be broad or narrow, meaning there's always some restriction as to who can become a member. However, there are credit unions for many groups, companies and communities, so chances are you'll be able to find an organization to which you can apply.
You can join one of these organizations if:
- Your employer sponsors a credit union for staff members
- A member of your family has already joined the credit union you're considering
- You're currently a member of a church, school, labor union or other group associated with a credit union
- A credit union has been established to serve your city or town
A focus on “common bonds” is important in credit unions, which is why fields of membership single out particular groups or communities. According to Jim Hanson, vice president at the Credit Union National Association (CUNA), 25 percent of the 8,000 existing credit unions are “community-based.” This makes the cooperative nature of credit unions more meaningful for members by offering a way to give back to and support a community with which they feel strong ties.
If you meet the requirements for a particular credit union, all you need in order to establish an account is a completed application, proof of eligibility and the minimum opening deposit. The minimum deposit is typically somewhere between $5 and $25, making credit unions accessible to most people regardless of financial status.
Once you join a credit union, you can remain a member for life even if your initial eligibility changes. It doesn't matter if you move to a new town, switch jobs or join a new church. You can still rely on your credit union for financial products and services, money management advice and communal support.
What is the Difference Between a Credit Union and a Bank?
It may seem that credit unions and banks offer the same products and services upon first glance. Both types of financial institutions give people a variety of options for saving money, writing checks, using debit cards, and getting loans. The same opportunities for financial solutions may exist at both credit unions and banks – but it doesn't mean those solutions are created equal. Here are some of the major differences between credit unions and banks:
The Pros and Cons of Credit Unions
| Feature | Credit Unions | Banks |
|---|---|---|
| Control | Account holders are members with ownership rights | Account holders are customers without ownership rights |
| Purpose | Not-for-Profit | For-Profit |
| Earnings | Returned to members through dividends | Go to shareholders |
| Fees | Are lower on average | Are higher on average |
| Services | Tend to have fewer | Tend to have more |
| Eligibility | You have to meet criteria to join | May allow anyone to open an account |
Credit Unions are Not-for-Profit
The primary difference between a credit union and a bank is their tax status. A bank is a for profit organization, while a credit union is not-for-profit.
Bank profits are returned as earnings to their stockholders. Stockholders receive their income through the bank customers. In order to serve the stockholders' interest, banks are incented to charge higher interest and fees in order to drive higher profits. The benefit of the bank's for-profit nature is that it also incented to drive innovation in order to attract and better serve its customers. As such, banks often offer valuable features and services that credit unions are slower to adopt. Large banks are also more widely available across the United States (and internationally), giving account holders more access to in-network ATMs and branch offices for conducting banking away from home.
Since the credit union isn't out to turn a profit, it can return its earnings to the members in the form of higher interest rates on savings products and lower interest rates on loans and credit cards. If a credit union should bring in more money than it requires to operate the organization, it will distribute the overage in the form of dividends to its members (everyone who has an account).
Credit Unions are Member Controlled
Account holders of banks do not have a vote in the decisions made by a bank. The board of directors of a bank is required by law to make decisions in the best interest of the stockholders – not the customers of that bank. A stockholder of a banking institution does not need to use that bank for his or her financial needs.
The board of directors for credit unions is elected by the members. This gives members more of an influence on the credit union, as each member has an equal vote no matter how much money they have on deposit or the number of accounts they have through the union.
Products and Services
Although terminology differs for some services, credit union offerings are generally the same as what you'd find at a bank. Common financial products and services offered include:
- Personal and business savings
- Personal and business checking
- Consumer loans
- Business loans
- Mortgages
- Home equity loans
- Small business support
Many credit unions are also able to provide financial education and help to members. This can be a big benefit for those who need guidance in making decisions about money or are confused about how particular services work.
Credit Union CO-OP
Joining a credit union also provides widespread access to funds at main offices and local branches as well as through ATMs and mobile banking. ATMs for credit unions belong to a nationwide network called CO-OP, providing 28,000 ATMs for members around the country to use free of charge. You can use your credit union card at other ATMs in a pinch, but this usually incurs a small service charge.
Thanks to the help of CO-OP Financial Services, credit unions are able to offer members access to a nationwide network of ATMs with no fees. Kiosks are available in most offices and branches and at a number of 7-Eleven stores. No matter what credit union you belong to, the shared nature of these organizations means you can use a CO-OP ATM at any location. This allows you to get money out of your account even when you're not in an area where your particular credit union has an established branch.
The CO-OP network was created by a group of credit unions in California in 1981 before interconnected technology was widespread. The goal was to help improve access for credit union members, and today the network provides ATMs and other services to 3,500 credit unions with over 5,000 branches. If you join a credit union, you have the option of finding an ATM through the location search on the CO-OP Financial Services website or downloading a smartphone app to direct you to the nearest location when you're on the go. Your credit union will likely also have a search function on their website, making it easy to find a kiosk no matter where you are.
Why Choose a Credit Union
Millions of Americans have chosen to do their banking at credit unions, for reasons both philosophical and practical. Among the top reasons most often mentioned are:
As member-owned organizations, credit unions are able to direct their products and service offerings toward the well-being of their members, without a competing need to generate and maximize profit at their members' expense.
Credit unions boast lower fees and superior rates as compared to their bank counterparts on the whole, as seen in the charts in the section below.
Since the customers are the member-owners in the case of credit unions, credit unions place a heavy emphasis on excellent customer service.
Credit union membership is typically based on commonality in location, employment, and other factors. As such, credit unions are able to maintain a narrow focus on supporting their particular communities.
To put it mildly, megabanks haven't enjoyed the best reputation in recent years. In the above ways and many more, credit unions represent a sort of 'main street' antithesis to these major Wall Street banks.
Is My Money Safe?
Credit unions and banks are regulated by different organizations and use different insurance funds, but the coverage is similar. Most credit unions are federally regulated through the National Credit Union Administration (NCUA), while the deposits are insured by the National Credit Union Share Insurance Fund (NCUSIF). It's important to note that not all credit unions offer government-backed insurance, so be sure to verify that your credit union is a member of the NCUA before selecting the financial institution.
The National Credit Union Share Insurance Fund is similar to the FDIC, except that it insures member accounts of federal and state-chartered credit unions rather than account holders at banks. It was created by Congress in 1970 and is also backed by the United States government.
Members' deposits are federally insured up to $250,000 per individual depositor. It is also possible to qualify for more than $250,000 in coverage if you spread your money across different ownership categories, including, for example: individual accounts, joint accounts, revocable trust accounts and certain types of retirement accounts.
According to the NCUA, “Not one penny of insured savings has ever been lost by a member of a federally insured credit union.” This strong statement of confidence provides assurance to those looking for an alternative to traditional banks.
How Did Credit Unions Get Started?
Credit unions have been serving the public in countries around the world for over 150 years. The existence of similar financial organizations can be traced back at least as far as the 1800s when workers in England created a consumer cooperative founded on many of the same guidelines used by modern credit unions.
German Roots
The cooperative finance movement popped up in Germany in 1846 after a difficult period of crop failures and subsequent famine. Hermann Schulze-Delitzsch and Friedrich Wilhelm Raiffeisen both wanted to help farmers maintain financial stability and started separate organizations during the following decades. Schulze-Delitzsch created a cooperative mill and bakery, and Raiffeisen worked to provide credit to farmers through the Heddesdorf Credit Union. Between the two organizations, Schulze-Delitzsch and Raiffeisen were able to bring new and better financial options to both urban and rural communities.
After a period in which credit unions expanded throughout several European nations, the idea finally landed in North America in 1901 with the establishment of the Caisse Populaire de Levis in Quebec, Canada. Founded by Alphonse Desjardins, this new institution was closely followed by the first credit union in the U.S., St. Mary's Bank Credit Union of Manchester, New Hampshire, in 1908.
State Charters
In the 1920s, Edward Filene hired Roy Bergengren to manage the Massachusetts Credit Union Association and promote the development of more credit unions across the country. They founded the Credit Union National Bureau together, hoping to create laws to organize the establishment and management of these organizations. This spurred on an explosion of state-chartered credit unions, resulting in 26 states creating requirements for operation and regulation by 1925. Today, most credit unions are chartered by the states in which they operate. The only exceptions are Delaware, South Dakota and Wyoming. Credit unions in these states must be federally chartered in order to serve members.
Federal Credit Union Act
Despite the devastating stock market crash of 1929 and the following period of financial hardship in the Great Depression, 32 states went on to establish credit union laws, and by 1930, 1,100 credit unions existed across the U.S. Four years later, President Franklin D. Roosevelt signed the Federal Credit Union Act, elevating the movement to a national level. This law established the requirements for a field of membership, and its enactment was followed by the creation of the Credit Union National Association to support newly formed credit unions.
Establishment of the National Credit Union Administration (NCUA)
The National Credit Union Administration (NCUA) was established in 1970 after a period of rapid growth for credit unions. During the 1960s, over 10,000 financial cooperatives appeared in the U.S. to provide services for over 6 million people. The National Credit Union Share Insurance Fund (NCUSIF) was created around the same time to insure the money deposited by members, although complete government backing didn't come until 1985. Throughout the 1980s, credit unions continued to expand and offer new services to members.
Controversy
Banks have been fighting against credit unions since they began. Banks claim credit unions have abused their membership restrictions which has given them an unfair advantage over community banks. Unlike banks, credit unions don't pay federal income taxes.
Operating as non-profit organizations means credit unions aren't required to pay federal income taxes. However, the institutions do pay property taxes, payroll taxes, and members pay income tax on any dividends received as part of a credit union's services. Supporters of this tax status point to the positive services credit unions offer communities, a characteristic at the core of every non-profit group. By providing services with beneficial social influences, credit unions operate for the good of their members and the betterment of the surrounding communities.
Credit unions are generally known to have better customer service than banks, but there have been occasions at certain credit unions in which significant service problems have affected many DepositAccounts readers. One problem that affected members of three different credit unions involved changes that the credit unions made to existing CDs. In two cases, credit unions increased the early withdrawal penalties on existing CDs. Normally, banks and credit unions only make such changes on new CDs or when CDs are renewed. In another case, a credit union tried several times to break the terms of a special share certificate. In all three cases, many DepositAccounts readers filed complaints to both credit union management and to regulators.