Credit Unions

Definition

Credit unions are not-for-profit financial cooperatives owned and controlled by their members. They provide a variety of banking services, including savings accounts, checking accounts, loans, and other financial products, with the primary goal of serving the financial needs of their members rather than maximizing profits.

5 Must Know Facts For Your Next Test

1. Credit unions are typically organized around a common bond, such as a workplace, community, or association, which unites the members.
2. Credit unions are regulated and insured by the National Credit Union Administration (NCUA), a federal agency, similar to how banks are regulated by the FDIC.
3. Credit unions often offer lower interest rates on loans and higher interest rates on savings accounts compared to traditional banks.
4. Credit unions are exempt from federal income tax, which allows them to offer more favorable terms to their members.
5. Credit unions focus on providing personalized service and tailoring their products and services to the specific needs of their members.

Review Questions

• Explain how the structure and ownership of credit unions differ from traditional banks.
  • Credit unions are member-owned and operated financial cooperatives, where the members are both the owners and the customers. This structure differs from traditional banks, which are typically owned by shareholders and operated to maximize profits for those shareholders. Credit unions are not-for-profit organizations, and any surplus earnings are returned to members in the form of lower fees, higher interest rates on savings, and more affordable loan rates.
• Describe the role of the National Credit Union Administration (NCUA) in regulating and insuring credit unions.
  • The National Credit Union Administration (NCUA) is the federal agency that regulates and insures credit unions, similar to how the FDIC regulates and insures traditional banks. The NCUA sets standards and guidelines for credit union operations, ensures the safety and soundness of the credit union system, and provides deposit insurance to protect members' accounts, just as the FDIC does for bank deposits. This regulatory oversight helps to maintain the integrity and stability of the credit union industry.
• Evaluate the advantages and disadvantages of credit unions compared to traditional banks from the perspective of a consumer.
  • The key advantages of credit unions for consumers include their focus on serving the financial needs of members rather than maximizing profits, the ability to offer lower interest rates on loans and higher interest rates on savings, and the personalized service and tailored products they provide. However, credit unions may have a more limited geographic reach and a smaller selection of services compared to large national banks. Consumers must weigh these trade-offs when deciding whether a credit union or a traditional bank better meets their financial needs and preferences.

Related terms

Cooperative: An organization owned and controlled by the people who use its services, with profits distributed among the members.

Member-Owned: Credit unions are owned and governed by their members, who are also the customers, rather than by outside shareholders.

Not-for-Profit: Credit unions operate on a not-for-profit basis, with any surplus earnings being returned to members in the form of lower fees, higher interest rates on savings, and more affordable loan rates.