When our Detroit and Romulus residents first learn about credit unions — often by visiting or joining Public Service Credit Union — there’s a strange sense of disbelief. How do credit unions work? We’ve already talked about what a credit union is and how easy it is to join a credit union, but that doesn’t answer the fundamental question of how an institution like PSCU is able to do all it does for its members without charging bank-like fees — and your deposit is insured.
Credit Unions: Cooperative Financial Institutions
That we have to explain how credit unions work is proof of the dominance of banks in the financial world; people can’t understand how an organization could provide financial services without massive overdraft fees and recurring ATM charges.
At first glance, a credit union might look like a bank. Both institutions:
- Hold deposits
- Make loans
- Issue checks
- Provide ATM services
- Offer investment opportunities
- Offer personal loans over high-cost options like payday loans
But in each of these services, a bank sees an opportunity to make money for its shareholders. Whether that’s through a fee or a slightly higher interest rate, the nickels and dimes of being nickel-and-dimed add up. A credit union doesn’t chase profits and indeed refunds money back to its members if it turns a profit.
So how does a credit union even function, if their goal isn’t to make money? It’s time to start thinking about banking differently, as credit unions are not-for-profit institutions. That means they are not subject to the same taxes as banks are, and they pass those savings on to members. There are four tiers of credit unions:
- Federal Credit Unions are regulated by the federal government as part of the Federal Credit Union Act
- State-Chartered Credit Unions are regulated by state banking authorities
- Natural-Person Credit Unions offer financial services to individuals
- Corporate Credit Unions provide liquidity and financial services to natural-person credit unions
And this is where we get into how credit unions work. What happens if you are looking for a car loan but your credit union has already had multiple members take out car loans? If it were just a collective of coworkers, you may be out of luck. But natural-person credit unions are usually a part of corporate credit unions that pool from other natural-person credit unions across the country to allow your local branch to be as free with their money as they need to be to help members.
It’s hard to believe credit unions began as a place for someone to borrow some extra cash to keep the lights on in the start of the 1900s, but as they’ve grown and people have become tired of paying a bank when they could be helping out a friend or coworker, credit unions have become a true rival to banks.
That was a long answer to a short question. The short answer: credit unions work by having members who are more concerned with helping each other than making a profit. It sounds like such a good idea because it is one, but it only sounds too good to be true because of the influence of banks.
How to Join a Credit Union
Joining a credit union is as simple as opening up an account. Different credit unions have different membership requirements, though. You might need to work in a specific industry or live in a specific county for some credit unions. For Public Service Credit Union, you need only be a Michigander: either live, work, go to school, or worship in Michigan and you can join and reap the benefits. Not sure how to choose a credit union? We can help.