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💸principles of economics review

Credit Unions

Written by the Fiveable Content Team • Last updated September 2025
Written by the Fiveable Content Team • Last updated September 2025

Definition

Credit unions are not-for-profit, member-owned financial cooperatives that provide a range of banking services to their members. Unlike traditional banks, credit unions are focused on serving their members' financial needs rather than maximizing profits for shareholders.

5 Must Know Facts For Your Next Test

  1. Credit unions are typically organized around a common bond, such as an employer, community, or association, which helps foster a sense of community and shared purpose among members.
  2. Credit unions often offer lower interest rates on loans and higher interest rates on deposits compared to traditional banks, as they do not have to generate profits for shareholders.
  3. The governance of credit unions is democratic, with each member having an equal vote in the election of the board of directors, who are typically volunteers from the membership.
  4. Credit unions are exempt from federal and state income taxes, which allows them to offer more competitive rates and fees to their members.
  5. Credit unions are generally smaller in size compared to large commercial banks, but they often have a strong local presence and deep understanding of their members' financial needs.

Review Questions

  • Explain how the not-for-profit, member-owned structure of credit unions influences their approach to banking services.
    • As not-for-profit, member-owned financial cooperatives, credit unions are focused on serving the best interests of their members rather than maximizing profits for shareholders. This structure allows credit unions to offer lower interest rates on loans, higher interest rates on deposits, and lower fees compared to traditional banks. The surplus revenue generated by credit unions is returned to members in the form of better rates and more affordable services, rather than being distributed to shareholders.
  • Describe the role of the common bond in the organization and operations of credit unions.
    • Credit unions are typically organized around a common bond, such as an employer, community, or association. This common bond helps to foster a sense of community and shared purpose among members, which can lead to stronger member engagement, loyalty, and trust in the credit union. The common bond also allows credit unions to tailor their products and services to the specific needs of their members, rather than taking a one-size-fits-all approach like many traditional banks. Additionally, the common bond can facilitate the credit union's understanding of its members' financial needs and the local economic conditions, enabling them to provide more personalized and responsive services.
  • Analyze how the democratic governance structure of credit unions, with each member having an equal vote, impacts the decision-making and priorities of the organization.
    • The democratic governance structure of credit unions, where each member has an equal vote in the election of the board of directors, ensures that the organization's priorities and decision-making are aligned with the collective interests of the membership. This structure contrasts with the shareholder-focused approach of traditional banks, where decisions are often made to maximize profits for a small group of investors. In credit unions, the board of directors, who are typically volunteers from the membership, are accountable to the members and must make decisions that benefit the entire membership, rather than a small group of shareholders. This democratic governance model helps to ensure that credit unions remain focused on meeting the financial needs of their members, rather than prioritizing profits or the interests of external stakeholders.