Credit Union

What It Means

A credit union, like a bank, is an institution that offers financial services to its customers. Among these services are checking and savings accounts, credit cards, and loans. A credit union, however, is different from a bank because it is cooperative (it is owned and managed by its customers, also known as members) and nonprofit (banks, on the other hand, offer their services to make a profit). Because of its nonprofit status, a credit union is required by law to operate with its members’ financial benefit in mind. Therefore, interest rates (which measure the cost of borrowing money) are often more favorable to costumers at a credit union than at a bank, where making money from its services is a top priority.

Credit union membership can be restrictive and have eligibility requirements. Some credit unions, for instance, are open only to particular segments of the population, such as those in certain labor unions, employees of specific companies, or residents of a particular neighborhood. In other words, members must share a common bond. Once you are a member of a credit union, you can usually remain so for life; you will probably not lose your membership if your circumstances change and you no longer meet the membership criteria. For example, if you belong to your neighborhood credit union but later move to another state, you can still keep your membership at your old credit union.

When Did It Begin

The first credit unions as they exist today were organized in Germany by economist Hermann Schulze-Delitzsch (1808-83) in 1852 and Mayor Friedrich Wilhelm Raiffeisen (1818-88) of Heddesdorf (now Neuwied) in 1864. These credit unions were owned and governed by their members, which elected volunteer boards of directors. Schulze-Delitzsch’s credit union arose from the need for food during a time of famine. The cooperative baked and sold bread to its members and then began to provide credit, thus becoming known as the “people’s bank.” Raiffeisen’s credit union, on the other hand, offered credit to the farming community so farmers could buy equipment and animals.

In 1900 Alphonse Desjardins (1854-1920), a stenographer in the Canadian Parliament, established the first credit union in North America. His goal was to provide low-interest credit to working-class people, who previously had access only to loans with exceedingly high interest rates. This credit union, Caisses Populaires Desjardins, opened in Lévis, Québec, Canada. Desjardins was also responsible for helping launch the first credit union in the United States, St. Mary’s Cooperative Credit Association in Manchester, New Hampshire, in 1909.

That same year the Massachusetts Credit Union Act was established. The act served as the foundation for many credit union laws to come. Boston merchant Edward Filene (1860-1937) was a key figure in establishing the act, and he was a strong influence in many subsequent credit union developments. In 1934 he helped organize the Credit Union National Extension Bureau, the predecessor to the Credit Union National Association, which provides services, such as industry information and public relations, to credit unions in the United States.

The Federal Credit Union Act, which allowed for the formation of credit unions anywhere in the United States, became law in 1934. The act set up dual chartering, which meant credit unions could be chartered (given the right to do business) by either the federal government or a state government. Those chartered by the federal government fell under the jurisdiction of the National Credit Union Administration, while state-chartered credit unions were ruled by the state.

Credit unions continued to grow in number. There were 8,683 credit unions in the United States in 1945, rising to 23,876 in 1969. In the 1970s new laws allowed U.S. credit unions to offer more services to their members, such as home loans. By 2005 the number of credit unions worldwide had surpassed 40,000, representing more than 120 million people in 84 countries. Canada was the country with the highest percentage of its population serviced by credit unions.

More Detailed Information

Though owned by its members, a credit union is controlled by a volunteer board of directors, which the members elect. All federal credit unions in the United States are also overseen by the National Credit Union Administration (NCUA), an independent government agency. As part of its mission, the NCUA insures savings of up to $100,000 in all federal and most state credit unions. If a credit union were to fail and close down, any savings account of $100,000 or less would be protected by the NCUA.

There are both philosophical and financial differences between traditional banks and credit unions. Credit unions are seen as democratic, with each member being an equal owner. All deposits are grouped together so that loans can be made to fellow members in need. This breeds a sense of community. Banks, on the other hand, are governed by shareholders (people who own stock in the bank), and bank customers, unless they happen to be shareholders, have no power over how the bank is managed. The goal of banks is to make a profit, and profits are distributed to the shareholders. Banks must pay federal income taxes; credit unions are nonprofit institutions and thus do not pay federal taxes.

Because they are nonprofit and do not pay taxes, credit unions often provide better interest rates than banks do on savings accounts and loans. Although rates change on a daily basis, the following examples from the United States in November 2006 reflect this trend: for a regular savings account (in which a customer received interest, or payment, for money placed in an account), credit unions offered an average interest rate of .93 percent, compared with .72 percent at banks (the higher number reflecting more money for the customer); for a two-year, new car loan (in which a customer borrowed money and was charged interest), the average rate was 6.19 percent at a credit union and 7.58 at a bank (the lower number indicating a smaller payment for the loan). For home loans there was little difference: an average of 6.38 percent at credit unions versus 6.34 percent at banks for a thirty-year, “fixed rate” loan.

Credit unions offer many of the basic services that banks do. These include savings accounts (known as “share” accounts in credit unions to emphasize member ownership), checking accounts (called share draft accounts), money market accounts, credit cards and cash cards, and various loans, including car, home, and home equity. Banks, however, offer a wider range of loans and services, especially for businesses. In addition, large banks often have more branches and ATMs (automated teller machines for withdrawing cash and making deposits), which can be convenient for customers.

Recent Trends

Because of their history of serving low-income customers, credit unions were known as poor man’s banks. Someone with little money could apply for a loan at a credit union and have some hope of receiving it, whereas at a traditional bank such a customer would likely be turned away. Credit union membership was also restricted to specific work groups or communities. As a result, credit unions provided little competition to traditional banks.

Times have changed, however, and modern-day credit unions offer many services and attractive rates, and restrictions regarding membership have loosened. In the United States banks have launched attacks against credit unions, namely in the form of lobbying Congress to change the tax-free structure of credit unions. Banks feel it is unfair that credit unions are not required to pay taxes and believe credit unions have grown larger and more “bank-like” than Congress first intended when it passed the Federal Credit Union Act in 1934. Credit unions argue that they earned tax-free status because they were nonprofit, cooperative institutions, a status that has not changed. In addition, large credit unions claim they still adhere to the same principles and fundamental structure as small credit unions.