A Crash Course in Credit Unions

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.