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Federal Reserve, the Economy and CD Rate Forecast - March 24, 2020An Overview of Credit Unions
One of things that you might have heard is that credit unions offer better deals than many banks. There are stories of better yields on deposit accounts, lower interest rates on auto loans and mortgages, and better rates on credit cards. However, one of the issues associated with credit unions is that membership is supposed to be limited. Credit unions, though, are enterprising enough to find ways around such restrictions. As non-profits, they are supposed to serve specific clientele. And that specific clientele is getting wide enough that it is possible for many different people to join – even if they don’t live in the immediate area.
The History of Credit Unions
For some perspective on the latest developments in credit union membership requirements, it can help to have a small history lesson. Credit unions have been around since the middle of the 19th Century. There are some differing accounts as to whether the first credit union appeared in England in 1844, or in 1852 in Germany. In any case, the idea of a cooperative effort to make financial institutions more accessible to the poor and lower middle class, and to the rural, began in Europe in the mid-1800s.
Capital needs for many groups were unmet at the time, and some banded together in order to form a credit union that could help them get access to the financing needed to keep small business ventures and family farms going. The movement spread throughout Europe, and then to the U.S. The first credit union in the U.S. was established in New Hampshire in 1908. The idea caught on, and by 1934 there were enough credit unions to band together to form a national organization of credit unions.
In the U.S., Credit unions today are granted special tax status as not-for-profit financial institutions. (Other tax rules and regulations may apply in other countries.) This distinction is important, since this status recognizes that credit unions do, indeed, need to turn a profit in order to better serve members. This is the main difference between the “not-for-profit” status accorded credit unions and that “non-profit” status that we are familiar with through charitable organizations. It is important to remember that, even though credit unions have special tax status, they do not run on donations. They do need to make a small profit, and this is recognized.
Members of the credit union are also part owners. They elect directors to sit on the board, and the main mission of credit unions is supposed to be to serve its members/owners, and turning a profit is supposed to be secondary.
Credit Union Membership
The main issue is who can become a member of a credit union. Traditionally, credit unions have served small populations – another reason for the favorable tax status that credit unions enjoy. Credit union members are supposed to share common characteristics. Some of these characteristics can include living in a specific geographic area, belonging to the same workplace, or attending the same university.
By narrowly defining who could join a credit union, these financial institutions limit themselves, but supposedly better understand the needs of their members. For many people, though, the membership requirements have been frustrating. How are you to join a credit union and take advantage of the perks if you aren’t an alumnus right university, or work for the right company? Without a community credit union to fulfill the need, many people found themselves at a loss, until credit unions began tweaking their membership requirements.
In this digital age, when online banking is common, credit unions are hoping to branch out and reach more people. Now it is possible for nearly anyone to join a credit union and take advantage of some of the perks associated with membership. This is because credit unions are allowed to cater to members of the same organizations, associations or charities.
Some credit unions only require you to donate a certain amount of money to a charity, and you can join a credit union. In some cases you may need to join a specific association – and pay the dues. If you can save thousands, though, by getting a better interest rate on your mortgage, it’s often worth parting with between $25 and $50 to join an organization that you might not have a true interest in.
And this is what has some banks upset.
Banks have to pay taxes that credit unions aren’t subject to and that, they assert, means that they can’t offers some of the same terms that are seen in credit unions. Bankers have been trying to get regulators to enforce tighter membership requirements on credit unions – or at least rescind their special tax status. So far, though, efforts have been largely unsuccessful.
Joining a Credit Union
While credit unions do not always offer the most for your money, they often do. If you are interested in joining a credit union, you can look in your local area and find out what the membership criteria are, and determine whether you meet them. In many cases, you can get information on steps you can take to become eligible for membership. And, if you can’t join a local credit union, there are actually credit unions that recruit using the Internet. You can look online to see what you need to do in order to joins a bigger credit union, even if you live on the other side of the country.
You should also keep in mind that there can be some inconveniences associated with credit union membership. Because credit unions are not national, finding an ATM can be difficult if you live across the country from your credit union, or if you are traveling. Make sure that your credit union is a member of a coop of credit unions. These organizations will allow you to make ATM transactions and perform other transactions if you belong to the same organized group of credit unions, free of charge. Make sure you understand where these coop credit unions are so that you aren’t racking up the transaction fees.
Joining a credit union isn’t the right choice for everyone, but for someone who is worried about the health of a bank, or who is interested in getting more for the money, it might be a good choice. Once you meet the membership requirements, double check to make sure that the credit union meets your expectations of convenience and savings.
For additional info on credit unions, please refer to these previous posts:
NYT Article On Credit Unions That Anyone Can Join
Resources to Help You Support Your Local Credit Unions
Credit Union Members Beware: Your Credit Union May Drop Federal Deposit Insurance
The Differences between Credit Unions and Banks
For example, my sister is a nurse with a local medical center. There is a specific CU that she is able to join because of her employment. She had not joined yet when I was interested in joining (due to high CD rates--some years ago), so I got a copy of her employee ID badge and was able to join the CU based upon her qualification. She later became a member and my parents and aunt/uncle also joined. My aunt is a sibling of my mom, so that is the way they got in. So, there are more membership possibilities than may seem so on the surface.
Almost forgot, CU's now sometimes allow for domestic partners and some even for roommates/nannies living at the same address as the member or qualifying potential member.
The reason for this is that corporations do not end-consume anything: all expenses of a corporation directly correspond to income for a human end-consumer. The human end-consumer pays taxes on that income.
In contrast, a human may have $40K in annual income, and will have to pay taxes on all of that entire $40K income, not just on the "profit" (income - expenses) that might be just $1K a year, assuming the expenses add up to $39K a year. So, the rent the human pays, or the food/car/clothing/energy expenses are not tax-deductible, because they represent end-consumption of value, and the government does not want to encourage value-consumption by subsidizing them with tax deductions. [Special cases have been made for mortgage interest, student loan interest, etc. in tax laws, because the government wants to encourage people to invest in their own houses, and acquire more education. It is arguable that this was not good policy, because all it did was to make housing and education more expensive.]
Banks exist to make profit. Nothing wrong with that. Credit Unions exist to serve members, avoid losses that would put them out of existence, and make small profits that would allow them to slowly build capital to grow in pace with the rest of the economy, to stay equally relevant in proportion to the growing economy. Nothing wrong with that either.
But, even if Credit Unions lose their special tax status [I'm not suggesting they should], there will be no significant impact on their ability to provide good deposit and loan rates. A perfect credit union which makes zero profit would still pay no taxes at all [becase the profit would be zero]. The tax would only slow down the rate at which the credit union can build capital through its small profits.
Essentially I am taking exception to this statement: "Banks have to pay taxes that credit unions aren’t subject to and that, they assert, means that they can’t offers some of the same terms that are seen in credit unions."
Banks having to pay taxes has nothing to do with their not being able to "offer terms that are seen in credit unions". Banks cannot offer those terms because they exist for the purpose of making as massive profits as possible, and offering better terms to their customers lowers their profits. Credit unions can offer such terms because they do not exist for the sole purpose of making as massive profits as possible: they just want to avoid losses, run at cost or with a small profit to slowly build capital to grow with the rest of the economy.
Paying taxes on profits has nothing to do with the difference [because corporations pay taxes only on profits, not on all income, so if any bank wants to provide better terms to its customers -- say, pay more interest on deposits -- its tax bill will go down in direct proportion to its profits. Having to pay taxes on profits, if any, can never interfere with the bank's ability to provide better terms to its customers.]
You should make this point instead of blindly repeating the stupid claim banks are making. Banks are making this claim to try to slow down the rate at which credit unions can build capital through their small and reasonable profits, and to prevent them from acquiring enough capital to survive tough economic times and to be able to slowly save up capital needed to make costly technology upgrades needed to provide 21st century financial services.
I have no problem with people or corporations doing business and earning profits. However, I believe in free market capitalism, and competition. Profit-seeking banks being forced to compete with not-for-profit credit unions for customers is a good thing for the US economy. This will force the banking industry to stay innovative.
Banks will be unable to work like a cartel charging high fees, paying zero interest, and charging unreasonably high rates on loans to make profits. Instead, they will be forced to find the profits they need through more efficient business processes (eg. the online banking model), and by thkinking of and providing more value-added services that people may actually want.
The profit-seeking motive is a powerful force, and when channelled in the right direction (away from price-gouging customers with unreasonable fees, paying zero or unreasonably low interest on deposits, and charging unreasonably high interest rates) through competition with credit unions, and into more productive areas (like more efficient business processes, and coming up with valuable services that people would actually want), would benefit the US economy.