What it means
Unlike a commercial bank, which is owned by shareholders who expect a profit, a federal credit union is owned by the people who use it. Each member has one vote, whatever the size of their deposits.
The credit union is run by a volunteer board elected from its members and typically offers savings accounts, current accounts, loans, mortgages and cards. Membership is limited to a defined group, such as employees of a company, residents of an area or members of an association.
This common bond has historically been the reason for the charter. The rules on who can join have been widened over time, so each credit union should be checked individually.
The federal regulator for these institutions is the National Credit Union Administration, which charters and examines them and runs the share insurance fund. Member deposits are insured up to a statutory limit per member for each ownership category, much like bank deposit insurance.
Because the limit is set by law and can change, it should be confirmed with the institution. The cooperative structure often leads to lower loan rates, higher savings rates and lower fees than banks, because there are no shareholder dividends to pay.
The trade-off is that credit unions may offer fewer branches, a narrower product range and less advanced digital tools. Business owners also find that some credit unions have limits on business lending.
For finance teams, a federal credit union matters as a place to hold payroll accounts, as a lender for employee loans, and as a competitor. Companies sometimes sponsor a credit union for their staff as a benefit.
Its financial strength is judged with measures such as capital ratios and loan quality.
In practice
Real-world examples.
Example
A hospital sets up payroll direct deposit into a federal credit union that serves healthcare staff. Nurses get a loan at a lower rate than at a commercial bank. The hospital's human resources team promotes it as a benefit, at no cost to the hospital. New hires can also set up a split deposit so that part of every paycheque goes straight to savings.
Example
A freelance designer joins a community federal credit union to finance a $12,000 equipment purchase. The credit union gives her a personal loan at a rate 2 percentage points below her bank's offer. She saves about $240 in interest in the first year.
Example
A manufacturing firm learns that its employees spend heavily on payday loans. The finance director arranges a partnership with a local federal credit union to offer small emergency loans at a modest rate. Absence and payroll advances drop in the following year. The director tracks both figures and reports the change to the leadership team.
Formula
Calculation
Annual interest saving = loan balance x (bank rate - credit union rate)
Suppose an employee borrows $20,000 for a car. A bank offers 7.0% a year and a federal credit union offers 5.5%. The saving in the first year, ignoring repayments to keep the arithmetic simple, = 20,000 x (0.070 - 0.055) = 20,000 x 0.015 = $300. Over a typical loan, the real saving is smaller because the balance falls as payments are made, but the direction is the same. The employee should also compare fees, because a lower rate with a high arrangement fee can erase the benefit.Case study
Seen in the real world.
Lakeshore Logistics is an illustrative, fictional company with 400 warehouse employees who often ask for payroll advances. The finance director, Samuel, estimates that administering advances costs the team about $30,000 a year in time.
He approaches a federal credit union that serves the region and arranges for employees to join through their workplace. Members can borrow up to $1,500 on a short repayment schedule, with repayments taken from payroll, at a rate far lower than a typical payday lender.
After a year, advance requests fall by about two thirds and the company saves around $20,000 in administration time, in this illustrative scenario. The lesson is that a credit union partnership can be a low-cost employee benefit and a way to reduce finance team workload.
Watch out
Common mistakes.
- Assuming a federal credit union is the same as a bank, when it is a member-owned cooperative with a common bond.
- Assuming deposits are uninsured because the institution is not a bank, when federal credit union deposits are insured through the federal share insurance fund up to a statutory limit.
- Assuming anyone can join, when membership usually depends on an eligibility group, though many are broad.
Questions
People also ask.
What is the difference between a federal and a state credit union?
A federal credit union is chartered and supervised by the federal regulator, whereas a state one is chartered by a state authority.
Who regulates federal credit unions?
The National Credit Union Administration charters, examines and insures them.
Do credit unions pay tax?
Federal credit unions are generally exempt from federal income tax because of their cooperative, not-for-profit status.
From the founder's library
Take it further with the book.
Build your financial confidence beyond this definition. Shihan's full-length guide, Accounting Fundamentals, takes the same plain-English approach and turns it into a complete, practical playbook for non-finance managers, business owners and students - with chapter-end quiz answers and presentation slides included.
25% off with code MMHQ25, applied at checkout. Priced in USD - checkout may show the equivalent in your local currency.
View the book and save 25%Related