How Do Credit Unions Make Money?

Although a credit union is operated cooperatively, as a “not-for-profit” entity, the “not-for-profit” status of credit unions should not be confused with “non-profit” entities such as charities. One thing’s for sure, credit unions make money.

Non-Profit Status

Credit unions are considered “not-for-profit” because they operate to serve their members, unlike banks, which generate profits for stockholders. Unlike a charity or other non-profit organization, credit unions do not rely on donations, or operate at a loss. As financial institutions, they do generate what is considered a profit in economic terms, needing to create a surplus in order to continue to operate and generate further profit for their members. The key is that the surplus is passed along to members in the form of high returns on their savings and deposits, and low interest rates on their loans.

Better Rates for Customers

Credit unions use their excess earnings to offer members more affordable rates on loans, a higher interest rate on savings, and lower fees. They also put their surplus into creating new products and services, such as online banking and bill payment software, or other benefits for the constituent members. Of course, they must maintain liquidity and a prudent reserve in order to stay in business, and with sound management, they do that too. In this respect, they are not markedly different from any other commercial venture, except that in a cooperative, the customers are also the bank’s owners.

Because of the restrictions of charter membership, in order to become a credit union member, you must either be part of the charter group or be related to someone in the charter group. If you are able to qualify for membership in a credit union, either through your work, family, profession, or community, it is worth investigating as credit union membership has many benefits.

Because credit unions are not in the business or providing profit for stockholders, they are often able to provide the best interest rates on loans, CDs, and other investment vehicles. Some credit unions even provide interest on checking accounts, and generally do not charge as many fees as banks do for the same services.