A credit union represents a financial cooperative. Members own these financial institutions. It is these members who both start and run them so that they can reduce costs for financial services and share profits with each other.
There are a variety of sizes of these institutions. A credit union might be a small operation that volunteers run. It could also be a substantial outfit with thousands of members or more. The idea is the same in either case. The business model has members pooling their savings within the credit union so that they can make loans to other members and receive financial benefits. Such benefits include lower interest rates on loans and higher savings rates.
Credit unions are similar to building societies in Britain, Australia, and other countries. Many of the building societies that allow members to invest their money to help members buy or build houses were started in the 1800’s. Halifax in the United Kingdom is the largest in the world with 18 million members.
It is easy to become a member of a credit union, especially when individuals are invited. Once they deposit initial funds into the account at the institution, they become part owners of the organization. This allows them to share in the profits that it makes. They also gain the rights to vote for the board of directors of the credit union and in other important decisions.
Many credit unions get started because a large corporation or other organization wants to offer these benefits to their employers or their members. In cases like these, profits can be invested in community services, membership interests, or projects that benefit the members. Credit unions are considered not for profit. This is because they are helping the community or their members out rather than making a profit for the organization itself.
When credit unions began in America, the membership had limitations to those who held a common bond with others in the group. They might have to live in the same town or work in the industry of the other members. Credit unions have since loosened up the rules for becoming a member. Banks have been frustrated by this development that permits many people to participate in a rival organization which does not have to pay taxes.
There are some risks to belonging to this type of organization. If the union is unable to cover its expenses beyond the services, they could possibly fail. Should the organization not possess enough cash flow, it will be unable to run the operations smoothly enough to take care of the members. At this point, it would be closed.
The benefits of belonging to such an organization are significant. The friendliness and feeling of community is greater than from an average bank. The unions also give benefits that a bank will not, like less expensive loans, better rates for credit, and other financial services without fees or with lower costs. Other unions provide the membership with significant advantages like free insurance coverage or reduced cost and free education.
The building societies of Europe predated credit unions in America. The first ones in the U.S. appeared in the 1900s. St. Mary’s Bank Credit Union of Manchester, New Hampshire became the first such organization in America. They are now found all over the globe. Some of them in the U.S. now run under the regulations of the Federal government instead of state regulations.