CREDIT UNIONS – HOW DO THEY WORK?

A credit union is a member-owned, not-for-profit financial cooperative that provides banking and lending services to its members. The nation’s leading credit unions function similarly to banks but with some key structural differences in ownership, governance, and operations.

Specifically, credit unions are owned entirely by their members, who all share a common bond – often an employer, organization, or community. For instance, company credit unions serve employees of particular businesses. When people deposit money at credit unions, they become member-owners instead of just customers.

Every member can vote for the volunteer board of directors drawn from the membership base. This governance gives members direct control over credit union decisions and direction. Since credit unions focus on service over profits, they return surplus earnings to members as dividends, higher returns on savings, lower loan rates, and expanded services rather than enriching external shareholders as banks do.

Also, since credit unions are nonprofits, they are exempt from most taxes, allowing more revenue channeling back to members. However, credit unions abide by strict regulations ensuring fiscal soundness. Requirements include regular auditing, transparency, oversight, and maintaining sufficient capital reserves.

While credit unions initially relied upon pooled member savings and earnings to finance lending and services, today’s credit unions also access outside lines of credit. However, the cooperative structure and mission limit risky behaviors like aggressive subprime lending that precipitated financial disasters among for-profit banks. This helps credit unions sustain stability.

Furthermore, many credit unions emphasize community development by extending affordable lending services to lower-income members often overlooked by banks through secured credit builder loans, flexible underwriting, and personalized guidance. Their access expands economic opportunity.

Institutions leverage shared resources to provide affordable, ethical financial services owned and governed by members. Through democratic control and reinvestment of profits into favorable rates and offerings, credit unions serve specific groups with customized products reflecting common desires, needs and values. In essence, credit unions are banks run for people over profits.