Many bank customers are becoming increasingly frustrated with the litany of fees their banks are charging, as well as the difficulties often associated with obtaining a loan. Credit unions represent an alternative to banks and possible solutions to common complaints about traditional banking institutions. Let's take a look at credit unions and what they have to offer.
What Is A Credit Union?
A credit union is a savings and loan entity formed by a group of people who share some common characteristics, such as a profession or geographic location. The members of the group pool their money to provide loans and demand deposit accounts to other members. Credit unions are not-for-profit entities that are owned and founded by their members; they function as democracies, with each member having a say in how the credit union is run.
Credit unions originated in Rochdale, England, in 1844 when a group of weavers established the Rochdale Society of Equitable Pioneers. They raised capital to buy goods at discount prices and then passed the savings along to their members. Friederich W. Raiffeisen is considered to be the founder of the modern credit union, and established the Heddesdorf credit union in Germany in 1846. Credit unions were then introduced in Canada in 1901 and finally came to America in 1908. Today, there are approximately 90 million members of credit unions nationwide.
Credit Unions' not-for-profit status does not exempt them from regulation. The National Credit Union Administration (NCUA) was created by the federal government in 1934 to oversee all credit union activities nationally. Like banks, credit unions are insured up to $100,000 for each account by the National Credit Union Share Insurance Fund, which guarantees solvency for credit unions in the same manner that the Federal Deposit Insurance Corporation (FDIC) protects the banking industry. Certain retirement accounts, such as IRAs may even be insured for up to $250,000, depending on state and local regulations. (For related reading, see Are Your Bank Deposits Insured?)
The objective of a credit union is summed up in the saying, "not for profit, not for charity, but for service." Since inception, credit unions have run according to a philosophy that has come to be known as the "Seven Cooperative Principals for Credit Unions". These principals are as follows:
- Voluntary Membership: All credit union members join on a voluntary basis and there is no discrimination of any kind among potential eligible members.
- Democratic Organization: Each member has one vote and all are equally able to participate in making decisions and creating policy.
- Economic Participation of Members: Credit unions are owned and therefore controlled by members, each whom will benefit proportionately according to the number of transactions in which he or she is involved, as opposed to the amount of assets that is deposited.
- Autonomy: Credit unions are independent organizations, and any association or dealings with an external organization or other entity must be done via popular democratic consent.
- Education and Training: Credit unions have a mission to educate and train their volunteer board members and administrators and also to provide financial education to their members and the public at large.
- Cooperation: Credit unions must endeavor to work together to achieve common goals at all levels of organization, including locally, statewide and nationally.
- Community Involvement: Credit unions have an interest in creating policies that help sustain the development of their immediate communities.
Higher Rates, Lower Fees, Better Service
The main advantage that credit unions offer is the ability to provide members with superior rates for loans and savings and also charge lower and fewer fees. Credit unions do not have to make a profit; all of their excess revenue is used to benefit the members, either by improving rates or reducing or eliminating fees. Furthermore, their not-for-profit status entitles them to a tax-exempt status not available to banks. Bankrate.com conducts monthly surveys that consistently show that credit unions pay higher rates on certificates of deposit (CD) than banks or other traditional savings institutions. Surveys of money market accounts show a similar difference in rates. (To learn more about money market accounts, read Getting To Know The Money Market and Money Market Vs. Savings Accounts.)
The banking industry does not regard credit unions as serious competition, as the combined assets of all credit unions in the U.S. equal only a small fraction of total U.S. bank deposits. However, membership in credit unions continues to grow, and most credit unions can now offer virtually all of the same technological amenities as any bank, such as internet banking, debit cards and a wide variety of products and services. Furthermore, membership criteria for credit unions is shifting away from organizational involvement to community residence. Many credit unions now regard any potential customer who lives within several counties of its location as a member.
Customers who are dissatisfied with the fees, rates and service of traditional banking institutions may be pleasantly surprised at the terms that are offered to them at their local credit union. For more information on credit unions, check out America's Credit Union.
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