State vs. Federally Chartered Credit Unions: What's the Difference?

How different charters impact state and federal credit unions

In the United States, credit unions are divided into two categories: state-chartered and federally chartered. Though they share many characteristics, requirements, and purposes, the difference in charters impacts the regulation and titling of a given credit union.

State-chartered credit unions fall under the regulatory authority of their respective state's division of financial services. Federally chartered credit unions all include the word "federal" in their name and fall under the regulatory authority of the National Credit Union Administration (NCUA).

Key Takeaways

  • Credit unions are financial institutions that provide banking services that are created, owned, and operated by their participants.
  • Credit unions are not-for-profit enterprises that enjoy tax-exempt status.
  • A federal credit union (FCU) is a credit union regulated and supervised by the National Credit Union Association (NCUA).
  • State credit unions instead adhere to state-specific regulations and guidelines, but not all states have such laws in place.
State vs. Federally Chartered Credit Unions

Investopedia / Alison Czinkota

State-Chartered Credit Unions

There are some advantages to state charters for credit unions. For one, federal credit unions have maximum interest rate regulations, whereas different states may have higher limits or no limits at all on interest rate charges. In addition, state regulatory authorities often have a much greater level of familiarity with their local credit unions than the NCUA enjoys with federally chartered credit unions.

Not all states charter or regulate credit unions. Arkansas, Delaware, South Dakota, Wyoming, and the District of Columbia do not have state-specific charters, meaning that all credit unions that operate within those states' borders must be federally chartered.

Some, though not all, state-chartered credit unions carry deposit insurance that is backed by the full faith and credit of the U.S. government. Some state laws require state-chartered credit unions to be federally insured. The NCUA insures state-chartered credit unions that seek and qualify for federal insurance.

Federally Chartered Credit Unions

Even though they include the word "federal" in their name, federal credit unions (FCUs) are not operated by the federal government. Not only are all of these organizations regulated by the NCUA, but they are also insured by the National Credit Union Share Insurance Fund (NCUSIF).

In 1970, Congress established the NCUSIF, which is managed by the NCUA, to insure member share accounts held at federally insured credit unions. Much like the Federal Deposit Insurance Corporation (FDIC) for banks, the NCUSIF is backed by the full faith and credit of the U.S. government.

The National Credit Union Share Insurance Fund (NCUSIF) protects accounts at federally insured credit unions up to $250,000; the $250,000 coverage applies to each share owner, for each account ownership category, per insured credit union.

What Are Credit Unions?

Credit unions are nonprofit financial savings and lending cooperatives whose members are also part-owners, distinguishing them from true intermediaries like banks. Many credit unions are considered to be more "community-oriented" and have significantly different operational objectives than other savings and lending institutions.

In the United States, credit unions are not-for-profit, tax-exempt organizations that were established with the Federal Credit Union Act of 1934. All credit unions are either chartered by the federal government or a state government. To maintain their tax-exempt status, they are limited to providing membership to narrowly defined segments of the population (church groups, labor unions, specific occupations, etc.).

However, it is possible for different credit unions to merge and combine their allowable population segments, meaning that many credit unions have broad memberships. The board of directors for credit unions is elected by all of its members, and members have votes in the decisions made by their credit union.

Ultimately, the differences between state and federally chartered credit unions are much less significant than the difference between credit unions and banks.