CREDIT UNIONS

Credit unions are financial cooperatives designed exclusively for the purpose of serving their members, who are also the "owners" of the cooperative. The credit union is a nonprofit financial institution and is generally as concerned with community involvement as with its bottom line. As reported in Black Enterprise magazine: "Not for profit, not for charity, but a service" is considered the credit union motto.

Credit unions provide a lower cost, "friendly" savings investment option, while still offering competitive interest rates as well as a wide variety of financial services for their members. In addition to loans, credit unions may also offer ATM (automated teller machine) access, direct-deposit bill payments and checking services, certificates of deposit, credit cards, money orders, money market accounts, and individual retirement accounts. Credit unions are also less likely than banks are to charge customers for common banking services, including ATM use, stop-payment orders, check bouncing, and electronic funds transfers. Corporate credit unions, which act as a credit union serving groups of credit unions, make available investment, settlement, and liquidity services individual credit unions are unable to provide.

CREDIT UNION MEMBERSHIP

Membership in a credit union is limited, and individuals must meet certain criteria to join. On the other hand, banks operate on an "open enrollment" basis, provided one has the appropriate, predetermined funds with which to open an account. Credit union membership is determined by its charter. Most members are from employee groups, associations, churches, or even residential communities. Because members of credit unions are "shareholders" (owners), they have a direct say in what the management practices of their credit union will be. Although membership in a credit union appears limited, a key objective of the credit union "industry" is to avoid exclusivity and extend its services to as many people as possible. This also helps further the community image of credit unions.

There are a few basic practices credit unions try to adhere to when soliciting membership. While banks may reject potential customers whose main purpose for joining is to secure a loan, a credit union may actually desire such a member (credit unions have members; banks have customers). According to Jack Dublin in his book, Credit Unions: Theory and Practice, nearly half of the world's credit union members joined a credit union with one intention: to secure a loan. Many of these members became diligent savers and contributors to their respective credit unions because of the success of their loan experience.

Another objective for credit unions is to induce all members of a family to join, not just the main wage earners in the household (family members are automatically eligible to join). By encouraging the entire family to join, credit unions not only enhance their assets, but may also obtain long term members. For this reason, credit unions are willing to enter into financial relationships with younger members (those below the age of 18). This practice not only is of great value to youth, but also provides the credit union with expanded assets.

Membership in a credit union may also be granted to organizations (such as a church parish), provided the organization comprises members who would be eligible for credit union membership on an individual basis.

SAVINGS, OWNERSHIP, AND INTEREST
RATES

A credit union serves its members for two primary reasons: to provide a place for savings and to provide funds for its members to borrow in times of need. Because credit unions operate democratically, they tend to discourage potential members whose deposits would be so large that the credit union would come to rely upon them. Such members, as shareholders, would then find themselves able to unduly influence the credit union's policies. Credit unions often provide easy-to-follow savings plans designed to encourage their membership to save regularly. This practice enhances the credit union's portfolio and makes it easier for members to obtain loans and receive favorable interest rates and dividend distributions.

A credit union has advantages over most profit-seeking banks and lending institutions regarding guidelines governing the maintenance of checking and savings accounts. For example, a bank may require a minimum balance for a checking account, charge fees for each check written, and assess penalties when one's balance dips below the minimum. On the other hand, a credit union is very likely to require no minimum balance and offer no-fee accounts. Many credit unions also pay their shareholders dividends, depending on financial performance for the year.

RECENT DEVELOPMENTS

Despite competition from banks and savings and loan associations, credit union membership continues to grow. Between 1988 and 1995, U.S. credit unions added more than $100 billion in assets, and credit union membership and deposits rose by an identical 4.1 percent in the first quarter of 1998. Credit unions are also beginning to tap into the lucrative mortgage loan market, with mortgage loans originated by credit unions rising 28 percent between 1996 and 1997. The future also appears bright, as credit unions are expected to offer new technologies and services, including personal computer banking, more rapidly than can banks and other financial institutions. Rapid expansion of credit union activities has led to some problems, however. The 1995 failure of the Capital Corporate Federal Credit Union, for instance, brought increased federal regulatory scrutiny of credit union operations. Also, a survey conducted that same year by the Filene Research Institute revealed that only 60 percent of credit union members felt that their institutions had "skilled, professional management," and only 7 percent of non-credit-union members felt that credit unions could handle their financial services needs.