What Is a Credit Union?

What you need to know about your credit union!

Exactly what is a credit union?

A credit union is a non-profit, financial institution, cooperatively owned by its members. Credit unions may be chartered either by the United States (federal credit unions – FCUs) or by individual states (state credit unions – SCUs). Credit unions are owned by their members, who each have one vote in the election of members of the board of directors and other issues that may come before the membership for a decision. The administrative, operational, and service policies of credit unions are established by the board of directors.

Who owns and controls a credit union? – Members cooperatively own the credit union. Since the board of directors is elected by the members, members also control the products, services, pricing, and administration of the credit union. The Federal Credit Union Act and federal regulations provide the legal framework and limitations on the powers and operations of federal credit unions. Respective, state laws and regulations, similarly, provide the legal framework and limitations on the operations of state chartered credit unions. The control structure of all credit unions, state and federal, and the relationship of any credit union to its members are the same.

What is meant by “credit unions are tax exempt”? Why are we tax exempt?

Federal credit unions are specifically exempt from federal income taxes by the Federal Credit Union Act, and state credit unions by Internal Revenue Service classification. However, credit unions do pay employment taxes, property taxes, and applicable local taxes. Tax exemption was granted by Congress to encourage the formation and growth of credit unions to provide financial services otherwise unavailable in the market place.

Tax exemption is based on the structure of credit unions. They are organized and operated as not for profit, mutual institutions. Credit unions are member owned with no outside, third party owners or directors. Directors are elected from among the membership as volunteers who serve without compensation. The net assets or capital of a credit union is owned by the members. Tax exemption is based on this not for profit, cooperative control and structure of credit unions.

Can anyone join any credit union?

No. In order to join a credit union, you must be in a credit union’s specific field of membership (FOM). Credit union members must have some commonality, called a common bond, such as occupation, affiliation, or where you reside (a defined community). A credit union can include more than one occupational or associational common bond, or even a combination of occupational and associational common bonds in its field of membership. The description of the common bond defines those eligible for membership. The field of membership is those eligible for membership.

In most instances, immediate family members of a credit union member are also eligible to join. While the ability to join a credit union is limited to those in the field of membership, an individual may be eligible for membership in more than one credit union because of an overlap in field of membership definitions and family membership.

Are all credit unions alike?

They are in terms of service objective, organization, and structure. All credit unions are not for profit and mutually owned by their members with volunteer directors to determine policy. However, credit unions differ by charter (state or federal) powers. They also differ in their fields of membership and operating policies that determine price, terms and conditions of the services they offer.

How are credit unions different from banks?

While banks and credit unions offer some similar financial services, they are very different institutions:


The purpose of a credit union is to meet the financial service
needs of members; the purpose of a bank is to produce a profit for its investors/owners.

Ownership and Control

A credit union is owned and controlled equally by its members, who are the users of its services. A bank is owned by investors in its common stock in proportion to the number of shares they own. These investor/owners may be third parties who do not use the services or products of the bank they own.

Sources of Capital

A credit union can only accumulate capital from earnings. Its capital is owned by the members. Bank capital is owned by stockholders, not its customers/users. A bank can increase its capital by selling more shares of stock in the capital market and/or to current investors, as well as retaining earnings.

Board of Directors

A credit union board is elected from among its members by the members (no proxy voting). Credit union directors are volunteers who serve without pay. Bank directors are elected by the stockholders. Bank, board elections are often controlled by management through the exercise of proxy votes. Individual stockholder control varies with the number of shares owned. Bank directors often receive fees for their service.


Credit unions can only serve their members; banks can do business with the general public, with no restrictions on who can be a bank customer, other than bank policy.

Member Versus Customer

Credit union membership is limited to those in the field of membership. Membership represents the status of an owner of the credit union. Members are eligible to run for the board of directors, and vote in the election of directors and other policy decisions that come before the membership.

Customers of a bank are those that purchase its products or services. They do not determine the policies that control the cost terms and availability of services, or elect the directors who make such decisions. Bank customers do not own the bank’s capital or receive dividends, unless they own stock.

Use of Earnings

Credit union operating earnings are returned to members through lower costs and higher yields, or retained as member owned capital to support service. Many credit unions pay special dividends and rebate interest to distribute excess income to members at the end of the year. Bank earnings belong to the stockholders and may be distributed as dividends on stock. No dividends or interest rebates are paid to bank customers.

Why Should I Join a Credit Union?

As a member, you are an owner, as well as a customer; you have a say in the operations of a credit union, far beyond any impact as just a customer. Since credit unions do not have to pay stockholder dividends, taxes, or directors fees, those funds are returned to members through service pricing and lower minimums, as well as interest rate rebates and bonus dividends. Furthermore, credit unions often provide the only source of low cost, user-friendly financial services available to many citizens. You own it; you get a better deal; its purpose is service to you, not to generate profits for someone else; you are doing business with yourself and a limited group of other members.