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Credit Unions

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Credit Unions Overview: Credit unions are non-profit cooperative financial institutions (similar to mutual companies owned by and operated for the benefit of their members. Credit unions fill a role similar to that of banks, taking in deposits and making loans. However, because they operate on a non-profit basis (and are generally exempt from taxes paid by banks), they tend to offer higher rates of interest on deposits and lower rates of interest on loans than do for-profit banks. Earnings may be returned to members as dividends.

History of Credit Unions: Credit unions as we know them today can be traced to a cooperative credit society founded in Germany in 1850, an outgrowth of a cooperatively-owned mill and bakery. In 1864, also in Germany, an organization called a credit union was established to assist farmers in purchasing livestock, equipment, seeds and the like. In 1900, Alphonse Desjardins of Quebec founded the first North American credit union, for the benefit of French-Canadians whom he found to be generally ill-served by banks. In 1909, he founded the first credit union in the U.S., to serve French-Canadian immigrants in Manchester, NH.

Membership of Credit Unions: Members of a credit union typically have to meet eligibility requirements, such as:

  • Residence in a given community or geographic area
  • Employment with a given company, university, hospital, school system, government, industry, etc.
  • Membership in an organization or association, many of which have social, professional, ethnic and/or religious affiliations

There also are low-income designated credit unions that serve low-income members in distressed areas, especially those underserved by conventional banks.

Increasingly, however, credit unions are being allowed to seek broader-based membership than their original charters presumed. This is often the case with credit unions founded to serve specific groups within a given geographic region that are today greatly diminished in numbers, such as employees of a company or industry that has scaled back or shut down, or immigrant groups that have since dispersed. As a result, the differences between such credit unions and banks are blurring, and the banking industry is understandably unhappy about having tax-exempt competitors that also are exempt from the Community Reinvestment Act.

Statistics on Credit Unions: The National Credit Union Association (NCUA), a federal regulatory agency, reports these figures as of year-end 2007 (treat these numbers as approximate, since the NCUA website is filled with conflicting information):

  • Total credit unions = 8,268
    • Federal credit unions = 5,036
    • State-chartered, federally-insured credit unions = 3,065
    • State-chartered, privately-insured credit unions = 167
  • Total assets = $754 billion
  • Total members = over 85 million
  • Total employees = over 200,000

Approximately 84% of credit unions have under $100 million in assets, for an average of $19 million each. They have an average of 417 members per employee. Operating expenses average 4.1% of assets.

Approximately 12% of credit unions have $100-500 million in assets, for an average of $216 million each. They have an average of 344 members per employee. Operating expenses average 3.8% of assets.

Approximately 4% of credit unions have over $500 million in assets, for an average of $1.4 billion each. They have an average of 381 members per employee. Operating expenses average 2.9% of assets.

For comparison, the pioneering Desjardins Group in the province of Quebec (which also has some offices in Ontario) claims to be the sixth-largest financial institution in Canada, reporting these figures as of year-end 2007:

  • Members = 5.8 million
  • Assets = C$144 billion
  • Locally-managed cooperatives within Desjardins = 536
  • Service centers (branch offices) = 919
  • Employees = 40,345
  • ATMs = 2,769

Note that the population of the province of Quebec is about 7.5 million, which indicates that Desjardins claims close to 75% of the population as members.

Positives: Credit unions appear to have pursued much more conservative lending policies than many major banks, and thus they generally have avoided much of the 2007-08 subprime and credit crises.

Negatives: The vast majority of credit unions will have modest operating budgets and levels of staffing. Accordingly, pay and promotional opportunities are likely to be commensurately limited. However, stability of employment is likely to be high, given the sound finances of credit unions so far.

Some credit unions have expanded into commercial lending, exposing themselves to greater risks.

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