Credit Union

What is a 'Credit Union'

A credit union is a member-owned financial co-operative. These institutions are created and operated by their members and profits are shared amongst the owners.

BREAKING DOWN 'Credit Union'

Credit unions range in size from small, volunteer-only operations to large entities with thousands of members. The basic business model is that members pool their money in the bank in order to be able to loan money to each other and achieve these financial benefits.

How to Become a Member

As soon as you deposit funds into a credit union account, you become a partial owner and participate in the union's profitability. You have a vote in the credit union's board of directors and decisions surrounding the union. Credit unions are formed by large corporations and organizations for their employees and members. Profits are used to fund projects and services that will benefit the community and interests of its members. The goal is to better the community, not to make a profit, which means that credit unions fall under not for profit status.

Originally, credit union membership was limited to people who shared a "common bond" including working in the same industry and living in the same community. In the recent past, credit unions have loosened the restrictions on membership, sometimes to the consternation of traditional banks, who have to pay corporate income tax on their profits. (Credit unions, as non-profit institutions, do not have to pay that tax.)

Risks and Benefits

Like any bank or any company, credit unions must generate enough extra money to cover expenses on top of the services they offer, or they're at risk of failure. When credit unions don't have enough incoming money, they aren't able to smoothly operate their systems of financial services to members and they must shut down.

On the other hand, most people report a higher sense of community and friendliness from credit unions than from typical banks. A credit union offers competitive credit rates, cheaper loans, and other financial benefits to its members. Some credit unions offer their members other perks such as certain types of insurance and access to cheap or free education.

To learn more about the specific benefits credit unions offer to their members, read 6 Benefits of Using a Credit Union.

How Credit Unions Have Evolved

Credit unions first appeared in the early to mid 1800s in Europe, but they didn't come to America until over half a century later. They have since become a worldwide presence. The first credit union in the United States was the St. Mary's Bank Credit Union in Manchester, New Hampshire. Credit unions originated as a way for communities to come together in a way that was beneficial to everyone involved. Today, credit unions have become so widespread that there exist Federal Credit Unions (FCU) which, despite the name, are not run by the government but simply operate under federal rather than state regulations.