What Are Credit Unions and How Do They Work?
Understand the fundamental nature of credit unions. Explore how these member-focused financial institutions operate and differ from traditional banks.
Credit unions are financial institutions offering a range of banking services to their members. They function as cooperative organizations, providing a secure environment for managing money. Credit unions accept deposits, facilitate loans, and offer various financial products. Their structure supports the financial well-being of members.
Defining Characteristics
Credit unions are distinct from other financial institutions because they are owned by their members, not external shareholders. When an individual joins a credit union, they become a part-owner. This ownership model means that credit unions operate on a not-for-profit basis. Any earnings generated are reinvested into the institution or returned to members through reduced fees, higher savings rates, or lower loan rates, rather than being distributed to shareholders.
These institutions often have a specific community focus, serving individuals who share a common bond, such as living in a particular area, working for the same employer, or belonging to a specific association. Credit unions also embrace democratic control, meaning each member has one vote in important decisions. This “one-member, one-vote” system ensures that the institution’s policies and decisions are aligned with the collective interests of its membership. Deposits held in credit unions are insured by the National Credit Union Administration (NCUA), providing coverage similar to that offered by the Federal Deposit Insurance Corporation (FDIC) for banks. This federal insurance protects member accounts up to $250,000 per depositor.
Membership and Governance
Joining a credit union requires meeting a “common bond” requirement, a shared characteristic among its members. This common bond can be occupational, such as working for a particular company or in a specific industry, or associational, meaning membership in a group like a church, labor union, or school. Many credit unions also serve individuals based on a geographic common bond, allowing anyone who lives, works, worships, or attends school within a defined community or neighborhood to join. To become a member, individuals usually open a basic share account, often with a small minimum deposit, which establishes their ownership stake in the cooperative.
Members of a credit union have specific rights and responsibilities, including the ability to vote for the board of directors. This democratic process allows members to have a direct say in the governance of their financial institution. Credit unions are governed by a volunteer board of directors, elected from and by the membership. These directors serve without pay and are responsible for setting the credit union’s policies, approving budgets, and ensuring the institution operates in the best interests of all members. Their volunteer status reinforces the member-centric and not-for-profit philosophy of credit unions.
Financial Products and Services
Credit unions offer a broad array of financial products and services that meet the diverse needs of their members. These include various deposit accounts, such as checking accounts, savings accounts, money market accounts, and certificates of deposit (CDs). These accounts provide secure places for members to manage their daily finances and save for future goals.
Beyond deposit services, credit unions are significant providers of lending services. They offer a range of loan products, including mortgages for home purchases, auto loans for vehicles, personal loans for various needs, and credit cards. Many credit unions also provide business loans, supporting local enterprises.
In addition to these core offerings, members can typically access modern conveniences like online banking, mobile banking applications, and extensive ATM networks. Some credit unions also extend services such as financial counseling and investment planning, aiming to support their members’ overall financial health.
The not-for-profit structure often allows credit unions to offer these services with more favorable terms, such as lower fees and competitive interest rates on loans and deposits.