Credit unions first got their legs in Europe in the mid-1800s, when famine, drought and loan-sharking drove several communities to establish credit unions to provide their citizens with fair and stable banking based on a sharing principle. They emerged in North America in the early 1900s, first in Canada, again as a reasonable alternative to those in the clutches of greedy money-lenders who were fleecing good Canadians who simply had no alternative. The Depression brought on an onslaught of bank closures starting in 1929, and leading to a loss of faith in commercial banking. Credit unions gained popularity and in 1934, the Federal Credit Union Act was passed in the United States allowing credit unions to solicit memberships with a common bond to create a not-for profit credit union in which, at its simplest, members lend money to other members.
Banks Versus Credit Unions
There are many differences between banks and credit unions. The primary difference is that credit unions are considered not-for-profit organizations with members who share a commonality (such as occupation, geographical location, or religion), and therefore have similar financial needs and interests. The credit union is run by the members in the form of volunteer Boards of directors made up of members. Major decisions (such as membership of the Board of Directors) are democratically reached by membership voting.
In contrast, banks are for-profit ventures with an open membership. They are run by a paid Board of directors who answer only to the shareholders of the company. Members do not get a say in administrative decisions. In banks, profits of the bank go to the shareholders, while in credit unions, profits are returned to the membership in the form of services such as low interest rates on loans and credit cards, free or low cost banking services, and higher saving rates.
There are some areas in which banks have the advantage over credit unions. Because they are often large conglomerates, banks must offer a full range of services in order to stay competitive. Their dealings include personal banking, but a large, important part of their business is in commercial banking. Because credit unions serve a specific membership, their services are focussed on the needs of those members and not diluted by aspects of big commercial banking business. You must take a look at what you consider are your banking needs and make sure that your credit union meets these. If it doesn’t, you can always deal with both credit union and commercial banking institutions in order to take advantage what both have to offer.
Another advantage that banks have over credit unions is accessibility. Until recently, many banks had branches on almost every street corner. In recent years, however, more banks have been trying to focus their customers in on Internet and telephone banking, moving further and further away from personal or even tangible services. Still, bank machines for larger banks are still more readily available nationally.
To offset this advantage, many credit unions offer little to no-fee banking, so that the only fee that you pay is that which is levied by the banking institution, not your credit union. The convenience that banks used to have over credit unions is waning, however, in light of massive branch and a switch to commercial ATMs rather than bank-specific ATM on business premises.
Another advantage the credit unions claim to have over banks is that they are service driven. In a consumer world where being treated as a human being rather than a number or a big fat cheque, being treated with customer-focussed service is, sadly, a treat. Because the credit union is owned by its members, the level of service is set by its Board and voting membership. Services include not only the basic services, for tellers to CDs and investment portfolios, they also include training members to be financially responsible.
Many credit unions are not merely places to put your money, they are resource centres to teach members how to be fiscally responsible. Many credit unions offer seminars on mortgages, budgeting, saving and investing for their members to attend. They try to work with their membership to promote fiscal responsibility in general.
Future of Credit Unions
Over the past ten years, there has been a mounting feud in the United States between banks and credit unions. Because of the non-profit status, credit union does not pay federal taxes that the banks are subject to. They maintain that this creates an unfair advantage for credit unions, citing this as the major reason that credit unions are able to offer credit card and loan interest rates that are 2 to 4% lower than those banks offer. While banks say that their complaint is about leveling the playing field, most credit unions representative will disagree, saying they are simply trying to destroy the competition.
Banks have tried to limit credit union power by going to court over certain definitions of credit unions. So far their only step legal step forward (which has already been partially reversed on appeal a year later), was a ruling for the banks who claimed that credit unions are supposed to have restricted membership, but seem to be expanding the definition of restrictions so that there are almost no restrictions at all. The banks claim that this jeopardizes their definition as credit unions and should therefore make them subject to the same laws and taxation that banks are beholden to.
The government as well as the people are not going to easily let go of their credit unions, however, as they are a tried and tested remedy against the helplessness of being subject to big banking policies and fees and unscrupulous lenders. While the credit unions continue to take a relatively small share of the market, banks will continue to try and discredit them and their philosophy, which is about as far from the capitalist money marketing banks you can get.
Credit unions will be around for many more years, and it is worth your while to explore what they have to offer, whether they become your primary banking institution, or another tool to try and avoid getting screwed by the exorbitant, often hidden fees of big banking today.
