What is a Credit Union

Currently in the United States, credit unions have over 86 million members, which represent roughly 44% of the economically active population. The presence of credit unions is equally as strong in Canada where there are more than 10.8 million members belonging to one. Despite this large representation, there is a vast majority of people who do not fully aware of what a credit union is.

Credit unions exist in a wide range of sizes, from volunteer operations with a couple of members to institutions with several billion dollars in assets and hundreds of thousands of members. No matter the size or number of members, credit unions are cooperative financial institutions that is privately owned and controlled by its members. They differ from banks and other financial institutions in that each member of the union who has accounts is the owners of the credit union. This is the main detail credit union focus on when they discuss their advantages over banks. It is this member ownership that has fueled the credit unions mission, People helping people.’ The credit unions have historically marketed themselves as providing superior member service and being committed to helping their members improving their financial health. Simply put, the healthier the finances are of their members, the healthier the credit union will be.

Credit unions offer similar financial services as a bank; including savings accounts, checking accounts, credit cards, certificate of deposits, and online banking. Even though the credit unions have different names for the accounts, like a checking account is called a share draft account, the real difference is centered on the finances. Credit unions typically pay higher interest rates on deposits, while offering lower interest rates on loans than other financial institutions.

Governmental regulatory agencies require credit unions to restrict their membership within defined areas of the population, called a bond of association of common bond. Meaning all members of the credit union need to have a common bond, whether it is where their members worship, attend school, or are employed by specific companies or trades. Smaller credit unions tend to offer a variety of ways to qualify for membership with the hope of extending their reach. One general principle followed by all credit unions is if the member no longer qualifies to be a member, such as changing professions, they can still remain a member. By following this principle, the credit unions are able to preserve their numbers easier.

One little known fact about credit unions is as a result of lobbying in the 1970’s, they are not subject to the federal Community Reinvestment Act. This act requires banks to provide services in low-income areas. It was determine than since credit unions are already meeting the financial needs of a broad spectrum of people who fall within the limits of their membership and are playing an active role in the development of the community. Perhaps it is one of the reasons why there has always been tension between credit unions and banks. Especially since numerous credit unions have grown and expanded their memberships to include large communities and entire states, making them indistinguishable at times.

Another difference between banks and credit unions is due to their status as non-profit financial institutions, credit unions are exempt from federal and state income taxes. Also, members pay income taxes on the dividends they earn through the accounts they maintain with the credit union, with the end result benefiting the financial health of the credit union and its members. With recent and future actions on the credit union’s common bond limits and federal tax status, their maybe implications on these institutions for efficiency and competitiveness with banks. In the end, members would be affected, along with smaller credit unions that would end up being absorbed by their larger brethren. In the near future we can expect to see a shift as the line will begin to blur between the financial institutions. Issues will arises as to whether the credit unions of the future will be able to primarily serve people as they have in the past or will they need to change their ways to compete on a global market.