A federal credit union (FCU) is a credit union that is chartered under the Federal Credit Union Act and governed by the National Credit Union Association (NCUA). The NCUA is a federal agency that was created in response to the Federal Credit Union Act of 1934.
What is this act and how does a federal credit union differ from a state-chartered credit union? To explain these and more, let’s start with some historical context.
Historical Background of Credit Unions
The existence of organizations similar to credit unions can be traced back all the way to the 19th century. These cooperative financial institutions originated in Germany, and had many of the same ideals shared by contemporary credit unions.
The first credit union in the United States was started in New Hampshire in 1908 — St. Mary’s Bank Credit Union of Manchester. Later, by the 1920s, Edward Filene and Roy Bergengren founded the Credit Union National Bureau with the objective of developing laws to regulate credit unions, which propagated an outburst of state-chartered credit unions.
By the next decade, there were 1,100 credit unions littered across the continental U.S. Then in 1934 (the time of the Great Depression) President Franklin D. Roosevelt passed the Federal Credit Union Act, which made credit readily available for the American population suffering from economic hardship. This act led to the development of FCUs. Both the NCUA and the National Credit Union Share Insurance Fund (NCUSIF), were formed as a direct response to the popularity of these credit unions, especially following their boom in the 1960s.
What Is a Credit Union?
To understand the differences between an FCU and a non-federal credit union, you should understand what a credit union is. Credit unions are:
- Financial institutions
- Mutual companies (meaning they’re owned by the members themselves)
- Restrictive, in terms of membership eligibility
Whereas traditional banks are for-profit entities that service “customers,” credit unions are owned and operated by and for their members.
What Services Do Credit Unions Offer?
A common misconception about credit unions is that they are not full-service financial institutions. According to Jay Ferrans, President of JM Financial & Accounting Services in Southfield, Michigan, “a lot of people feel that credit unions are smaller because they are more member-focused, but credit unions can be just as powerful as banks.”
Credit unions offer standard banking services, such as:
- Checkings Accounts
- Credit Cards
- Loans (e.g., auto, home, personal)
- Savings Accounts
- Small Business Support
When looking into these services, it’s important to consider important questions such as how much dividends do savings accounts earn? Various savings accounts offer different benefits, leading people to open more than one. If you’re wondering, how many savings accounts should I have?, carefully weigh the pros and cons before deciding. Asking these important questions will help you to make an informed decision when opening an account.
Credit unions may also provide customized financial services that cater to the interests of its members, often offering benefits such as financial education and technical assistance with their products.
For example, credit unions may provide financial education, which can be a helpful resource for community members. Financial literacy empowers individuals to learn about services they aren’t aware of or don’t understand and receive counseling before making crucial financial decisions.
Credit unions offer these financial services because their members are also the owners, so their success is the credit union’s success.
What are Mutual Companies?
Mutual companies are privately owned cooperatives, meaning members hold shares of the company. The very appeal of cooperative businesses is that they are founded, owned, and operated by its own members. Who better to trust to manage your finances than yourself? That’s the underlying philosophy behind credit unions.
The board of directors is also elected by members. This endows members with more authority in the credit union’s operations, and each member’s vote is of equal value regardless of the deposits or accounts owned.
The number of shares granted per member, depends on the number of deposits. To open an account, a member must meet a minimum level of deposits — which is typically at least the cost of a share in the union. See more about how to open a credit union account on our blog.
Where Do Profits Go?
As a not-for-profit organization run by its members, credit unions funnel any earnings back into the institution for the benefit of its members. How does this benefit credit union members?
- Dividends distributed to members
- Higher dividend rates on savings products
- Lower interest rates on credit cards
- Lower interest rates on loans
- Lower minimum balance to open an account
- Reduced fees
As part of their not-for-profit structure, credit unions can also invest in their community. For instance, Mission Federal Credit Union serves San Diegans and has made it their mission to give money back to the San Diego community by building partnerships with local non-profits.
How Is Eligibility Determined?
Requirements to join a credit union may vary but, unlike traditional banks, they are legally required to offer membership to a defined demographic within the population under the FCU Act. This is known as a single common bond, multiple common bond, or community.
Affiliation with the following collectives is a standard requisite for credit union membership:
- Current employees or retirees from specific employers
- Labor unions (e.g., teachers, firemen, federal employees)
- Residents of a particular region
- Educational institutions
- Church groups
However, credit unions can serve multiple single associational and occupational common bond groups. Today, almost 90 million Americans belong to a credit union, and $615 billion are being held in American credit unions. On a global scale, there are over 46,000 credit unions and approximately 172 million members.
To see if you qualify, check with your local credit union representative about opening an account.
How Do Federal Credit Unions Differ from Non-Federal Credit Unions?
In terms of qualification, an FCU is required to be authorized by the NCUA to operate legally. It is regulated by the NCUA and grants its insurance by the NCUSIF.
Whereas non-federal credit unions comply with state-established guidelines,not all states have defined regulations. Consequently, by default, credit unions located in the regions listed below are subject to and insured by a federal charter:
- South Dakota
- District of Columbia
Although state-chartered credit unions are not necessarily guaranteed to be federally backed, they can become insured by the federal government. As a matter of fact, currently, about 98% of non-federal credit unions in the United States are federally insured.
If a credit union isn’t insured by the federal insurance fund, it doesn’t mean it isn’t covered. The credit union is simply insured by private insurers. FCU’s however, are insured by the U.S government and offer many services and locations.
At the end of the day, whether you choose a federal or non-federal credit union, it all depends on what you are looking for and what qualities you prioritize.
Why Have a Dual Chartering System?
Competition between federal and non-federal chartered credit unions fuels their drive to continually improve. Individual states are spurred to be conscious of and to address the needs of their constituents. Charters are compelled to routinely update techniques to be relevant and efficient in daily operations.
Together, the dual chartering system works to:
- Counter complacency
- Prevent a concentration or abuse of power
- Respond to issues on a local and federal level
Invest in Yourself
As with any decision with financial implications, it’s essential to take your specific needs and interests into consideration. Selecting a credit union is no different than choosing a healthcare provider that is best suited for you and your family. It can require in-depth research, so that you’re able to make an informed decision.
Make a fruitful investment in your future, and learn how to take advantage of all the benefits credit unions offer you today by talking with a Mission Fed expert at the San Marcos credit union branch or another one of our conveniently located branches in San Diego County.
The content provided is intended for informational purposes. Mission Federal Credit Union disclaims any liability for decisions you make based on the information provided. References to any specific commercial products, processes, or services, or the use of any trade, firm, or corporation name in this article does not constitute endorsement, control or warranty by Mission Federal Credit Union.
Department of Financial Institutions. The Dual Chartering System – Benefits of the State Charter.
DepositAccounts. What is a Credit Union?
GoBankingRates. What’s the Difference Between a Credit Union and a Federal Credit Union?
Investopedia. Federal Credit Union – (FCU).
Investopedia. State vs. Federally Chartered Credit Unions: What’s the Difference?