A credit union is a cooperative financial institution that is owned and controlled by its individual members. Unlike a bank, which exists to provide profit for its stockholders, a credit union is operated on a “not-for-profit” basis, and as a result, returns profits to its members in the form of higher interest rates on deposit accounts and lower rates on loans.
Credit Union Vs. Bank
In most respects, a credit union is indistinguishable from a retail bank: It provides the same services to its members that a bank provides to its customers, including checking and savings accounts, CDs, money markets, and loan products such as mortgages, auto loans and lines of credit. The primary different between a credit union and a bank, beyond the nonprofit status, is that every credit union has a specific field of membership under which a person must qualify in order to join that particular institution.
How Do Credit Unions Work?
In the United States, most credit unions were founded as a response to the Great Depression. The inability of many workers to get loans from struggling banks caused Congress to pass the Federal Credit Union Act of 1934, which encouraged the creation of nonprofit lending cooperatives with limited membership that would operate for the purpose of promoting thrift and providing credit at reasonable rates.
These credit unions would be limited to “groups having a common bond of occupation or association, or to groups within a well defined neighborhood, community or rural district.” These types of credit unions have what is called an SEG Charter, which means that they are chartered to serve a specific group of employees. Members of a trade, industry or profession can charter a credit union under a TIP Charter. Community Charter credit unions are restricted to members of a community, such as anyone who lives in, goes to school in or attends religious services in a particular city or county.
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 with a credit union, either through your work, family, profession or community, it is worth investigating as credit union membership has many benefits.