The basics behind credit unions

An inside look at what sets credit unions apart from other financial institutions.

By WP BrandStudio

By the early 1930s, the American banking system had all but collapsed. Thousands of financial institutions were forced to shutter, and lending plunged by nearly 60 percent. Seeking an alternative, vulnerable Americans increasingly began pooling their precious savings in the form of lending cooperatives, otherwise known as credit unions.

In the nine decades since the Great Depression, participation in these financial institutions has ballooned. Today there are more than 102 million credit union account holders across the country. Committed to better deals and better service, credit unions like PenFed provide Americans an important alternative to big banks. And with the country facing renewed economic uncertainty, there’s never been a better time to learn about these lending organizations.

What is a credit union?

Just like banks, credit unions offer savings and checking accounts, and make loans. But while many banks are owned by shareholders, credit unions are not-for-profit and owned by their members. Bank profits are typically returned to their investors in the form of dividends. Credit unions, by contrast, use their earnings to give their members a better deal.

Nationwide data reveal that credit unions consistently offer higher interest rates on checking accounts, savings accounts, money markets and certificates of deposit than banks. They also charge lower rates on credit cards, and on home and car loans.

“I wake up each day thinking about how I can pay as much on deposits and charge the least I can on loans to benefit our members, who are our owners,” says James Schenck, CEO of PenFed, the nation’s second-largest federal credit union. “A bank CEO’s primary responsibility is to pay the least they can on deposits and charge the most on loans and return the difference to shareholders.”

What are the benefits of credit union membership?

First and foremost, there’s those lower rates. For example, credit unions charge a 1.65 percent lower interest rate on average than a bank on 5-year car loans, according to the most recent available data. That would save the average new-car buyer $1,747 over the life of the loan.

What’s more, credit unions are often willing to offer loans to customers that the banks would turn away, according to Mike Schenk, chief economist at the Credit Union National Association (CUNA), an advocacy group for credit unions. They’ll look beyond credit scores to get a more holistic picture of an individual borrower. “Credit unions tend to be smaller and focused on local communities,” Schenk said. “They’ll listen to your story.”

Credit unions are also known for great customer service. A 2018 study found that “credit unions are among the highest-rated services we’ve ever evaluated with 96 percent of our members highly satisfied vs. 80 percent for the three biggest national banks. That satisfaction is driven by good customer service, not surprising when you consider that credit unions are owned and managed by their members.”

How are credit unions helping people during the pandemic recovery?

Credit unions are in a better position than banks to help customers during economic downturns due to their different ownership structures. “During challenging times, banks have to tighten lending and raise their fees more quickly than credit unions,” says Schenck of PenFed. “If banks report reduced earnings during their quarterly reports to shareholders, their stocks will suffer. We can support our members over the long haul. We know that if you bridge someone for a time, they’ll be your customer for life.”

During the 2008 recession, for example, lending by credit unions rose, while bank lending fell, according to federal government data. And with the country facing another economic slump, credit unions are again stepping up. As of early June, credit unions had lent $2.8 billion to small businesses under the Paycheck Protection Program. And while big banks are tightening criteria for mortgage and home equity loans, many credit unions are lending at full steam: PenFed’s mortgage volume more than tripled for the first quarter of 2020 compared to a year earlier.

Who do credit unions serve?

Credit unions are committed to serving a population that looks like America. More than two-thirds of credit union branches are in racially and ethnically diverse areas, according to a new study from CUNA. About half qualify for a federal low-income designation because a majority of their members have below-median earnings.

This commitment to diversity and inclusion is also reflected in credit union leadership. For example, fifty-two percent of credit union CEOs are women, according to CUNA. That’s an astonishing figure, given that women are still woefully underrepresented in financial services leadership. By comparison, only about 5 percent of commercial bank CEOs are women.

Can anyone join a credit union?

Credit unions were created to serve people with a “common bond,” such as employees of a company or residents of a town. “Today, however, some credit unions are open to everyone,” says Gaurav Bhatia, chief marketing officer at PenFed. “Although PenFed was founded to serve the military, everyone is eligible to apply.”

These institutions are cooperatives: One member’s savings becomes another member’s loan. By joining a credit union, you contribute to the financial well-being of all members. In other words, just by putting your money into your account, you get to be part of something bigger.

“We’re very fortunate to have reached a new milestone recently—we’re 2 million members strong,” said Bhatia. “It shows the power of the credit union that people are still joining during this challenging time. It shows that we’re better together.”

Learn more about the benefits of credit unions at PenFed Credit Union.

Sources:

Consumer Reports

Credit Union National Association

Federal Reserve of San Francisco

National Association of Federally-Insured Credit Unions

National Credit Union Administration