How Does a Credit Union Make Money?

Credit unions are financial institutions distinct from traditional banks, operating as member-owned, not-for-profit entities. They serve members rather than external shareholders, using generated revenue to benefit those who bank with them. While not aiming to maximize profits, credit unions must generate sufficient income to cover operational costs, maintain financial stability, and enhance services. This approach allows them to offer competitive financial products and services while upholding their cooperative mission.

Lending Operations

Lending money to members is the primary way credit unions generate revenue. Like banks, they earn income by charging interest on various loans, including mortgages, auto loans, personal loans, and small business loans. The fundamental financial mechanism is the net interest margin: the difference between interest collected on loans and interest paid on member deposits. For instance, if a credit union earns 5% on a loan and pays 1% on a savings account, the 4% difference contributes to its revenue.

Maintaining a diverse loan portfolio is important for financial health. By offering a variety of loan products, credit unions mitigate risks from economic fluctuations, ensuring a steady stream of interest income to serve members effectively.

Non-Lending Income Streams

Beyond interest from loans, credit unions also generate revenue through non-lending activities. Fees for services contribute to income, though these are typically lower than those charged by for-profit banks, aligning with their member-centric mission. Common fees include out-of-network ATM usage, overdrafts, wire transfers, and safe deposit box rentals.

Investment income provides another revenue stream. Credit unions invest excess funds—money not immediately deployed as loans—in secure, low-risk financial instruments. These investments include government bonds, certificates of deposit (CDs), and other short-term securities, generating returns that support financial stability.

Interchange fees also contribute to non-lending income. When members use debit or credit cards, the credit union receives a small percentage of the transaction from the merchant. This fee accumulates across numerous transactions, providing a steady source of non-interest revenue.

Reinvestment and Cooperative Model

Revenue generated by credit unions, whether from lending or non-lending activities, is not distributed to external shareholders as profit. Instead, surplus earnings are reinvested directly back into the institution and its members. This distinguishes credit unions from traditional for-profit banks.

This reinvestment translates into tangible benefits for members. Credit unions offer more favorable terms, such as lower interest rates on loans and higher interest rates on savings accounts. Surplus funds also enable the credit union to improve and expand services, including enhancing technology for online banking and mobile apps, or extending branch networks.

The cooperative model ensures the financial success of the credit union directly benefits its member-owners. Through this reinvestment, credit unions maintain competitive pricing, foster financial well-being among their members, and support community development. This cycle of revenue generation and reinvestment reinforces their mission of “people helping people.”