The term credit union can be a little misleading, even
though credit unions have been operating in the United States since 1909. After
all, we tend to think of credit as something used instead of money, and a union
conjures up images of laborers uniting against injustice. But the truth of the
matter is that credit unions have played a major role in the lives of Americans
for over a century.
As of 2020, more than one-third of Americans belong to a
credit union and there are 5,164 credit unions in the United States with 122.3
million members managing $1.75 trillion in total assets, according to the National
Credit Union Association. [NCUA]
Initially, credit unions were started in Germany when
several mills and bakeries combined their assets to have stronger buying power.
During World War II, credit unions sold 12 million war bonds worth $404 million
to help fund the war effort in the 1940s.
In 1970, the NCUA was formed by the government to insure accounts up to
$250,000 and oversee the Foundation Credit Union in terms of federal laws.
But despite the longevity of credit unions, many people do
not understand how they differ from banks and what they offer to their members.
Although banks and credit unions have similar offerings, there are some
important distinctions between these two types of institutions.
One of the biggest differences between the two financial
entities is their profit status. Banks are for-profit, meaning they are either
privately owned or publicly traded, while credit unions are not-for-profit
institutions. This for-profit vs. not-for-profit divide is the reason for the
difference between the products and services each type of institution offers.
A credit union is owned by its members; the institution is
actually set up as a cooperative. In addition, as a not-for-profit, credit
unions are also generally exempt from federal taxes, and some credit unions
even receive subsidies from the organizations that they are affiliated with.
This means credit unions do not have to worry about making profits for
shareholders.
It is the credit union's mission to provide its members with
the best terms it can afford for their financial products. This means members
generally get lower rates on loans, pay fewer (and lower) fees, and earn higher
APYs on savings products than bank customers do. In addition, because credit
unions have members, they often are very involved in those members'
communities. This may result in financial education and outreach to consumers
and greater attention to small business needs.
According to Forbes, "Banks are focused on making a
profit, rather than specifically centering on the needs of the account holders.
This is one of the reasons you'll often find that banks charge more fees, and
at a higher rate than credit unions do. Interest rates on lending also tend to
be higher at banks, while their APYs on savings products tend to be lower."
It also used to be true that credit unions weren't very
common and, as such, not very convenient for everyday use. However, credit
unions have grown both in membership and in brick-and-mortar locations,
offering many of the same conveniences as traditional banks such as ATMs,
drive-thrus, and online banking, as well as credit and debit cards and programs
with third-party insurers.
Now more than ever, consumers can make a decision between a
traditional bank and a credit union knowing that the differences in technology,
financial offerings, convenience, and rates are closer than ever before and
that credit unions might just be the best choice.
