How Do Credit Unions Make Money?

By Jamie Young

WWR Article Summary (tl;dr) What is a credit union and could it be an option for you? Jamie Young from gobankingrates takes a look.

Although operated cooperatively as not-for-profits, credit unions should not be confused with nonprofit charities. Because one thing’s for sure: Credit unions make money. Here’s how.

As financial institutions, credit unions generate what’s considered a profit in economic terms, which is needed to create a surplus in order 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 do make money in a way that is similar to banks, 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 not-for-profit because they operate to serve their members, whereas banks generate profits for stockholders. Unlike a charity or other nonprofit organization, credit unions don’t rely on donations.

Credit unions use their excess earnings to offer members more affordable rates on loans, a higher interest rate on savings and lower fees. They also put their surplus into creating new products and financial services, such as online banking and bill payment software or other benefits for the constituent members. Of course, they must maintain liquidity and a prudent reserve in order to stay in business. In this 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, in order 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.

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