What Is a Credit Union?

A credit union is defined as 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” cooperative basis, and as a result, provides profit for its constituent members. In most other 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.

In the United States, most credit unions were founded as a response to the Great Depression. In response to the inability of many workers to get loans from struggling banks, Congress passed 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 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 they generally do not charge as many fees as banks do for the same services.