What are credit unions?

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In contrast to commercial banks, credit unions are not-for-profit financial cooperatives that are owned and operated by their members. As a non-profit cooperative, any profits that are produced through a credit union’s activities are shared among the members of that credit union.

Types of credit unions

American credit unions typically fall into one of four basic categories, depending on their membership requirements:

  • Federal credit unions. A federal credit union is a credit union that is both chartered and supervised by the NCUA (National Credit Union Association). This agency of the federal government operates in a similar manner to the FDIC (Federal Deposit Insurance Corporation). These types of credit unions work much like retail banks, other than the fact that each member of the credit union is a partial owner as well as a customer.
  • Employer credit union. An employer credit union is an institution that is established to serve the needs of employees of a particular company, as well as their families. There are numerous employers that sponsor their own credit unions.
  • Group credit unions. A group credit union requires that its members be part of a specific group such as members of a particular church, school (including alumni) or even homeowners’ association.
  • Community or local credit unions. A local or community credit union only serves those who live, work, or worship in a particular community or local area. The membership of a community or local credit union is based primarily on geography.

In order to join a credit union, a customer must meet the membership requirements of that credit union. As you can see, some credit unions are much more restrictive than regular banks.

History of credit unions

These “cooperative financial institutions” were essentially created for those who share a common bond. For example, there are some credit unions that serve members of certain organizations, as well as those who work for the same company. In addition, those who are members of the same church, members of the military, or those who live in the same community may also have a particular credit union at their service.

Credit unions can also vary a great deal in size. While some of these financial institutions are large entities with several billion dollars in assets, there are others that are simply small volunteer operations with only a small number of members.

The very first credit unions started in Germany in the 1800s, having many of the same type of membership requirements that today’s credit unions possess. These entities were based on the value of self-help, democracy, and equality.

Credit unions began in North America back in 1901, with founder Alphonse Desjardins, mayor of Montreal. These financial entities also entered the U.S. in the early 1900s, with St. Mary’s Bank of Manchester, New Hampshire, holding the distinction as the first of its kind.The growth of credit unions in the United States took off following World War II.

How credit unions operate

Credit unions often can be quite active in the communities that they serve. This service is typically done via the supporting of development in the local area, as well as through sustainable international development on a more local level.

Although credit unions often resemble commercial banks, there are some very distinct differences between the two types of institutions. Just like commercial banks, most credit unions offer many of the following services and products for its member customers:

What separates the two, however, is the fact that   commercial banks are for-profit institutions. Another major difference between credit union and most commercial banks is that the members of the credit union are also the owners of the institution, although mutual banks are also owned by their members.

Banks’ profits come in the form of interest on loans, the collection of fees on various types of customer accounts, and the reinvestment of money that is earned in order to make even more profit. Because banks make profits, they are required to pay both federal and state tax.

Conversely, any profits that are earned by a credit union will be either paid out to the entity’s member-owners in the form of dividends, or will be invested back into the institution. In addition, because they are not-for-profit institutions, a credit union is not required to pay either federal or state tax. This allows some credit unions to provide lower interest rates on the loans that they offer to their customers, as well as better rates on other financial services that are provided.

Over the past several years, credit unions have become increasingly popular, and today, there are approximately 90 million credit union members in the United States.These entities have, however, met some resistance to their growth – primarily from the banking industry. In this case, banks have stated that credit unions’ not-for-profit status has led to unfair competition in the financial services sector.

Today, as banks continue to earn record profits through higher customer fees, many are leaving these for-profit financial institutions and moving their business to Credit unions instead.

Disclaimer: NetCredit is a direct personal loan provider and does not provide financial advice, nor does it vouch for any vendor or service mentioned on our NetCredit personal finance blog or online consumer loan glossary. Always research and perform due diligence on any service provider or vendor before deciding to use them, and we recommend that you speak with a financial advisor regarding all decisions that will affect your finances.

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