How Do Credit Unions Make Money?

irin-k / Shutterstock.com

Although they’re operated cooperatively, the not-for-profit status of credit unions should not be confused with the non-profit status charities have. Because one thing’s for sure: Credit unions make money.

See: The Advantages and Disadvantages of Credit Unions

How Credit Unions Make Money

The difference between a bank and a credit union is that credit unions are considered not-for-profit because they operate to serve their members, whereas banks generate profits for stockholders. Unlike a charity or other non-profit organization, credit unions don’t rely on donations. As financial institutions, credit unions generate what’s 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 higher returns on their savings and deposits — and lower interest rates on their loans when they need to borrow money.

Credit Union Rates Are Better 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 financial 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. In this respect, credit unions aren’t 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 a certain group — like a school, church or community — or be related to someone in the group. If you’re able to qualify for membership in a credit union, either through your work, family, profession or community, it’s worth investigating as credit union membership comes with many benefits.

Because credit unions aren’t in the business or providing profit for stockholders, they’re often able to provide the best interest rates on loans, CDs and other investment services. Some credit unions even provide interest on checking accounts and generally don’t charge as many fees — like ATM fees or overdraft fees — as banks do for the same services.

Keep Reading: Best Credit Unions Anyone Can Join

Comments