Credit Unions
Credit unions are nonprofit financial institutions that provide a range of services similar to those of commercial banks, including checking and savings accounts, loans, and investment options. Operating on a cooperative model, credit unions are owned by their members, who have equal voting rights, meaning every member can influence the management and direction of the institution. Membership is typically limited to individuals who share a common bond, such as living in the same community or working for the same employer.
Historically, credit unions originated in the mid-1800s as cooperative savings societies in Europe and have since evolved, with the first credit union in the U.S. established in 1909. They are generally smaller than commercial banks and often provide personalized service, with many members reporting higher customer satisfaction. Credit unions tend to offer lower fees, better interest rates on savings, and lower loan rates, as they reinvest earnings for the benefit of their members rather than distributing profits to shareholders.
Despite facing competition and regulatory challenges from the commercial banking sector, credit unions have adapted to meet changing consumer needs, seeing significant growth in membership as they promote benefits like fee-free checking. As of 2023, over 140 million Americans were members of federally insured credit unions, which collectively held assets totaling approximately $2.26 trillion. While they are praised for their community-oriented approach, debates continue regarding their tax-exempt status and the impact of large credit unions on the market.
Credit Unions
Credit unions are financial institutions that offer checking, savings, credit, loans, and investment services. Credit unions offer many of the same services as commercial banking institutions, but are based on a nonprofit, shared ownership model in which the collective funds stored at a credit union are used for lending and investment on behalf of the credit union’s members. One of the basic principles of the credit union system is that every customer, regardless of his or her relative investment in the system, has an equal democratic vote in determining the ownership and management of the credit union. In general, credit unions are smaller than commercial banks and surveys indicate that credit union customers feel they receive better and more personalized service.
According to the National Credit Union Administration, in 2024, there were 140.4 million members of federally insured credit unions in the United States. United States credit unions may be monitored by the federal government or by state supervision. Membership in a credit union is usually limited to individuals who share a common livelihood, place of residence, or membership in some other defined group. Most credit union members gain membership by joining credit unions that serve residents of a certain city, neighborhood, or zip code.
History of Credit Unions
Credit unions evolved from cooperative savings and banking institutions that started in Europe in the mid-eighteen hundreds. The earliest functional credit union on record was an organization established in 1844 in Rochdale, England, by a group of weavers and workers who pooled their money to provide loans and credit within the community. German lawyer Franz Hermann Schulze-Delitzsch established a similar credit society in 1849 that served the same purpose, taking pooled investments from within the community and using them to fund credit for members.
In 1900, Alphonse Desjardins organized the first credit union, La Caisse Populaire de Lévis, in Levis, Quebec. Desjardins then assisted a group of French Americans to create the United States’ first credit union, which was established in Manchester, New Hampshire, in 1909. In 1921 Edward A. Filene and Roy F. Bergengren organized the Credit Union National Extension Bureau in Boston, Massachusetts, to facilitate the development of US regulations regarding credit unions, and to promote the establishment of new credit unions in the United States.
In 1934, President Roosevelt signed the Federal Credit Union Act, formally establishing a federal system of credit unions. In 1961, the US Social Security Administration reported that credit unions grew rapidly, reaching over six million members in the United States by 1960. Organizations like the National Credit Union Administration (NAUA) were created to regulate and protect funds stored in credit unions. The services offered by credit unions were also expanded, including a 1977 federal legislation that allowed credit unions to offer mortgages and checking accounts, which were previously offered only by commercial banks.
In 1990, a petition jointly filed by representatives of the commercial banking industry attempted to prevent credit unions from expanding access to other employee or consumer groups outside those that the union was originally founded to serve. The controversy resulted in a reformulation of credit union regulations, and a new Credit Union Membership Access Act, put into law in 1998, that gave federal credit unions the authority to add new employee groups.
Credit Unions versus Commercial Banks
One of the primary differences between credit unions and banks is that commercial banking is a for-profit industry, meaning the banks are businesses owned by shareholders who earn dividends from the bank’s earnings. By contrast, credit unions are nonprofit entities that are collectively owned by all clients who keep and borrow money from the institution. Credit unions therefore earn revenues through voluntary deposits, rather than through investing funds on behalf of stockholders. Earnings accrued by a credit union are intended to be used for the common good, by lowering interest on loans and increasing interest on savings, as well as allowing the union to develop and offer new services. In commercial banks, earnings translate into increased shares for stockholders.
While commercial banks are open to any member of the public with sufficient income and identification to open an account, credit union membership is typically limited to certain occupational or geographic areas. As cooperative organizations, credit unions invite members of communities to pool their resources for personal and community growth. However, as they are limited to certain regions or communities, credit unions may be more limited in the geographic scope of their services.
In terms of banking services, many credit unions in the United States offer services comparable to those offered by commercial banks, such as basic checking accounts, sometimes called share draft accounts. According to Marte, approximately 80 percent of credit unions offer free checking, compared with less than 50 percent of commercial banks. Credit union fees for checking are typically 5 to 20 percent lower than similar fees at banks. However, economic research firm Moebs Services found that credit unions are also less likely to waive checking fees.
Like commercial banks, credit unions may charge fees for overdrafts and for using ATMs outside their service area. To compensate for lower geographic coverage, many credit unions offer customers access to a shared cooperative ATM system, and can often give fee-free access to a larger number of ATMs than many commercial banks.
When it comes to loans and interest rates, credit unions can offer higher interest rates on savings accounts as a result of reinvesting earnings to increase interest in favor of its customers. The higher interest rates offered by credit unions are also related to lower overall expenses, as a result of credit unions being free from federal taxation, as nonprofit entities, and not having to pay dividends to stockholders. Historically, credit unions have also been able to offer lower loan rates compared to commercial banks.
In general, commercial banks command the majority of customers in the United States and aggressively invest their revenues in an effort to increase profits. Commercial and marketplace competition among banks translates to rapid development of new features, and efforts to stay abreast of the latest technological banking trends. By contrast, credit unions are slower to adapt to new technologies when it comes to mobile banking, online banking, and similar industry developments. Despite falling behind banks in consumer innovation, credit unions invest earnings in new services and have slowly adopted mobile and Internet-based banking services comparable to commercial banks.
Historically, credit unions have scored better than banks on customer satisfaction surveys. However, in 2024, after a five-year slump as compared with banks, credit unions saw a 5 percent gain in customer satisfaction due to strong improvement in value perceptions.
Credit Unions Today
Credit unions have adjusted to client wants and needs over the twenty-first century. In 2011 and 2012, as a number of large commercial banks began charging fees for debit card transactions, credit unions responded by advertising free checking, free debit card use, and lower monthly balance requirements. As a result, credit union growth increased during the 2011–12 period, and this growth continued. According to the Credit Union National Association, more than four million Americans joined credit unions in 2023.
The commercial banking industry has been attempting to limit the growth of credit unions since the 1970s. In the 1990s, the banking industry attempted to limit its loss of customers to credit unions by arguing for prohibitions that would prevent credit unions from expanding their membership, and requiring credit unions to restrict membership to narrowly defined groups of customers. The federal government rejected banking objections and passed laws in the late 1990s that allowed credit unions to expand their operations and offer membership to larger populations. As credit unions expanded, several large credit unions converted to become banks. Credit union members objected to the shift in status, with some arguing that the conversion to bank status was motivated by credit union officers hoping to earn higher incomes.
In 2023, the total assets of federally insured credit unions in the United States were $2.26 trillion. The banking industry has argued that large credit unions should no longer be allowed nonprofit status and exemption from federal taxation. Commercial banks argue that large credit unions have an unfair advantage and that further expansion should be limited unless credit unions begin paying taxes. Supporters of the credit union system argue that credit unions should continue to enjoy tax-exempt and nonprofit status as long as they continue to function legitimately for the public trust.
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