How Credit Unions Make Money

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BY JAMIE YOUNG

As financial institutions, credit unions generate what’s considered a profit in economic terms — which is needed to create a surplus to continue to operate and generate further profit for their members. The key is that the surplus is passed along to members in the form of higher returns on their savings and deposits — and lower interest rates on their loans when they need to borrow money.

Credit unions make money similar to how banks do, such as from fees, interest rates and other funds paid by customers. The difference between a bank and a credit union is that credit unions are considered nonprofit because they operate to serve their members, while banks generate profits for stockholders. Unlike a charity or other nonprofit organizations, credit unions don’t rely on donations.

Credit unions use their excess earnings to offer members more affordable rates on loans, higher interest rates on savings and lower fees. They also put their surpluses into creating new products and financial services, such as online banking and bill payment software.

They must maintain liquidity and a prudent reserve to stay in business. In that respect, credit unions aren’t markedly different from any other commercial venture, except that in a cooperative, the customers are also the bank’s owners.

Because of the restrictions of charter membership, to become a credit union member, you must either be part of a certain group — like a school, church, industry or community — or be related to someone in the group. If you’re able to qualify for membership in a credit union — either through your work, family, profession or community — it’s worth considering as credit union membership comes with many benefits.

(SOURCE: TCA)