Q: WHAT ARE THEY?
A: As defined by the Credit Union National Association (CUNA): "Credit unions are financial institutions formed by an organized group of people with a common bond. Members of credit unions pool their assets to provide loans and other financial services to each other."
Credit unions are not-for-profit co-ops and they offer a range of loans, accounts, and other financial services, just like you'd find at your local bank branch.
Q: WHAT'S THEIR PHILOSOPHY?
A: Jim Blaine, CEO of the North Carolina State Employees Credit Union, summed up the philosophy this way: "Credit unions try to provide low-cost consumer financial services at a fair, reasonable price and in the best interest of the membership."
Credit unions prefer to use the term "member," rather than customer. Members behave like customers when they use their credit union's services, but they're also owners and investors in the organization. "At a bank," Blaine says, "you have customers and investors. They're not necessarily one in the same. They are utterly distinct and separate roles."
In other words, bank customers generate profits for the bank's investors; credit union members generate earnings for themselves.
Q: WHO CONTROLS A CREDIT UNION?
A: Like other cooperatives, credit unions are owned by their members. But unlike most financial institutions, which are owned by investors who hold shares in the company, with credit unions, each individual who belongs is technically an owner of one share of the organization. Credit unions follow a one-member, one-vote philosophy, which means that a member with $500 at the institution gets as much say as someone with $50,000.
Credit unions are operated by volunteer boards, members of which are selected by the organization's members. Other financial institutions tend to be controlled by paid boards.
Q: WHO CAN JOIN?
A: By law, every credit union has a specifically defined field of membership. Each one serves members who have a "common bond," which could include employment, geographic location, schooling, or military service. If you don't fall into an obvious category, but a member of your family does and is a member of a credit union, chances are, you can join the same one. Proponents say, with 92 million credit union members nationwide and some 8,000 institutions to choose from, with a little research, almost everyone can find a credit union that they're able to join.
Q: HOW DO I JOIN A CREDIT UNION?
A: If your employer doesn't offer membership in one, you can find a credit union through online locators or www.findacreditunion.com. CUNA can also put you in touch with your credit union state league -- leagues are credit union trade associations at the state level -- by phone at 800-358-5170 or online. Check out the Web sites or contact the specific credit unions that come up in your searches to find out if you're eligible to join.
Q: DOES IT COST MONEY TO JOIN?
A: There isn't an application fee, per se. But when you join a credit union, you must make a deposit, usually $25 or less. That deposit put into your savings account is your "membership share," your investment in the co-op. You must keep that money in your account to maintain your membership. If you move away or close your account, you'll get that share amount back.
Q: WHAT ARE THE ADVANTAGES OF A CREDIT UNION?
A: As a co-op, credit unions pass on their earnings to their members through offering better fees and lower rates, which CUNA says saves their members billions. Some, but not all, credit unions pay their members annual bonuses or dividends. A study by Forrester Research, Inc. found that credit unions received much higher customer satisfaction rankings than banks.
Proponents of credit unions say that the basic structure of credit unions is a key advantage. As a member, you're an owner and investor; the organization is looking out for your interest.
Q: WHAT ARE THE DISADVANTAGES OF A CREDIT UNION?
A: As you would at other financial institutions, you should mind the terms and conditions of the accounts at any credit union you're considering. That's where any of the specific disadvantages might appear. One particular credit union might have higher fees than another, or a more punitive overdraft policy, for example. Also, because credit unions are often smaller in size than banks, many offer fewer services. At larger credit unions, you'll find all the same services that banks have.
The National Credit Union Administration (NCUA), the national regulatory body for credit unions, has noted that, "while many credit unions offer responsible small loans, others offer payday loans or sham 'alternatives' that differ little or not at all from predatory, destructive traditional payday products." The NCUA also found that many credit unions that offer payday loans have interest rates above 18 percent, and some loans are almost as expensive as commercial payday loans. For example, the Nevada Federal Credit Union purports to charge no interest and discloses a 0 percent interest on its 7-to-14-day loans of $200 to $500, but the credit union charges a $40 to $50 "application fee." These fees amount to an annual rate of 206% to 650%, according to the National Consumer Law Center, an advocacy group that lobbies for the reform of consumer laws on behalf of low-income Americans.
Q: ARE SAVINGS ACCOUNTS INSURED?
A: Yes. Since 1970, credit unions have been insured by the NCUA and are backed by the full faith and credit of the U.S. government. The administration's insurance fund works in much the same way as FDIC insurance does for banks -- accounts are guaranteed to $250,000. Almost all of the 8,000 state and federally chartered credit unions are insured by the fund, with the exception of a few that have elected to have private insurance.
If you're concerned, inquire or look in the door or window of the credit union you're considering. Just as banks display an FDIC sticker if they are insured, credit unions will have a NCUA sticker.
Q: WHAT INTEREST RATES CAN A CREDIT UNION CHARGE ON A LOAN?
A: The Federal Credit Union Act sets an 18 percent cap on interest rates at federally chartered credit unions. State chartered credit unions must abide by the usury laws in their respective states. Most state laws are similar to that of the federal government. Two states, South Dakota and Delaware, do not have usury ceilings, but all credit unions in those states are federally chartered. So even if you live in those states—both home to many major bank credit card operations—your credit unions still have to abide by the 18 percent limit.
Q: WHAT ARE THE DIFFERNCES BETWEEN CREDIT UNION CREDIT CARDS AND BANK CREDIT CARDS?
A: An October 2009 Pew Charitable Trusts study compared credit cards issued by the 12 largest banks to those of the 12 largest credit unions. The study found that the credit unions' cards had advertised rates between 9.90 and 13.75 percent annually, which were approximately 20 percent lower than comparable bank rates.
The study also found penalties to be "less frequent and less severe" for both interest rates and fees at credit unions. Nearly half of all credit unions surveyed did not impose penalty rates on their credit cards, while 90 percent of banks did. And since credit unions must stay below their 18 percent usury cap, the penalty rates maxed out there, while banks charged a median penalty rate of 28.99 percent.
Credit unions also have lower penalty fees; median penalties on a credit union credit card are $20, compared to $39 from banks. The study determined that credit union cards more closely complied with the guidelines against "unfair or deceptive" practices that the Federal Reserve developed in 2008.
Q: DO CREDIT UNIONS HAVE OVERDRAFT FEES?
A: Yes. Though credit unions generally charge less on overdrafts than banks, the amounts of those fees and number you can incur vary greatly. As always, ask questions and read the fine print.
Jim Blaine of the North Carolina State Employees Credit Union told us, "At our organization if you have six overdrafts within a 45-day period, we're going to close your account. We go to our member and say, 'We love you, and we understand that you're paying these fees, but financially, this does not make sense. And as a consumer cooperative, we can't justify keeping this account.'" They then offer the member a savings account or another alternative without the risk of overdraft fees.
Other credit unions are not necessarily as consumer friendly. The New York Times, reporting on overdraft fees, featured a man who was charged about $325 in "member privilege" overdraft fees in the course of a year. Ironically, he said he joined the credit union in order to avoid just such a practice.
CUNA has concerns about the proposed legislation in Congress regarding overdrafts. They say the bills introduced in the House and Senate, which limit customers' accounts to one overdraft per month and six per year, are too restrictive. They say that many members value the overdraft privilege products and that such restrictive laws will limit credit unions ability to provide that service.
Q: DO CREDIT UNIONS HAVE ONLINE BANKING?
A: Yes. Many credit unions offer the same basic online services that banks do. But what they offer may depend on the size of the organization; larger ones are more likely to have more features. When looking at credit unions, explore their Web sites and make sure they will meet all of your needs.
Q: DO CREDIT UNIONS HAVE ATM ACCESS?
A. Yes. While the credit union that you decide to join may not have thousands of ATMs like a national bank, it may very well belong to something like the CO-OP Financial Services Network. The network has 28,000 surcharge-free ATMs throughout the country. That way a teacher in Los Angeles can use the ATM at a credit union in New York developed for firefighters without paying a fee. If considering joining a credit union, ask if their ATMs are part of an extensive network.
Using your ATM card outside your network may still cost you a fee. So consumer advocates say it's wise to make sure you have access to your credit union's free ATMs near home or work.
Q: HOW DID CREDIT UNIONS BEGIN?
A: According to CUNA, the first credit union was formed in Rochdale, England in 1844, when a group of weavers formed the Rochdale Society of Equitable Pioneers. Members bought shares in the organization to raise capital to buy goods at lower prices, and then those goods were sold to members at a savings.
In the United States, credit unions were first established at the state level in the early 1900s. In 1934, President Franklin Roosevelt signed the Federal Credit Union Act. The law, designed to "promote thrift and thwart usury," authorized the formation of federally chartered credit unions across the country.
Jonathan Jones is a journalist with the Investigative Reporting Program in Berkeley, California. He is currently working on a book about the rubber industry in West Africa.
Zachary Stauffer is a journalist with the Investigative Reporting Program in Berkeley, California. He is also a freelance director of photography who works regularly with FRONTLINE and FRONTLINE/World.