Credit Unions

Credit unions are not-for-profit, member-owned, democratically controlled financial cooperatives — that is, they are mutual organizations operated entirely by and for their members.

Once you deposit money in a credit union, you become a member, not just a customer, because your deposit is considered your share of the ownership in the credit union.

Historically, credit unions offered only savings accounts and consumer loans. Many have expanded their services, particularly the larger credit unions, during the past few decades in response to their members' changing — and more sophisticated — financial needs. Some credit unions offer credit cards, debit cards, checking accounts, IRAs and share certificates. Credit unions also are expanding the types of loans they offer. Many offer mortgages, home equity loans, student loans and small-business loans to members.

Credit unions may look like banks in that they both offer financial products and services to consumers. But that's where the similarities end and the differences begin.

As cooperative organizations, credit unions exist solely to meet their members' financial needs, not to make a profit off of them. In fact, after expenses are paid and reserves are set aside, credit unions return their "profits" to members in the forms of lower loan rates, higher savings rates and free or low-cost services. That's why consumers typically get better rates at credit unions. For-profit financial institutions, on the other hand, exist to generate profits for a relatively small group of stockholders at the expense of their customers.

As a member-owner of a credit union, you have a voice in the overall governance of the credit union. Each credit union is run by a volunteer board of directors elected by, and from, the membership. This democratic process ensures the board remains accountable to the membership. At for-profit financial institutions, the boards of directors are accountable only to stockholders, not to customers.

While for-profit financial institutions can serve anyone in the general public, credit unions can serve only the individuals within their fields of membership. A credit union's field of membership is the association, affiliation or residential area stipulated in its charter that legally defines who may become a member.

Credit unions were created to enable people to pool their financial resources to help themselves and each other. Credit unions still operate by this People Helping People philosophy today. They exist to bring people together in a cooperative effort so these people can receive low-cost, high-quality financial services. This philosophy helps explain why since 1984, credit union members have been more satisfied with the service they receive from their credit unions than bank customers are, according to a well-known national survey of consumers' attitudes toward financial institutions.

Credit unions are not known just for their outstanding service, however. They are also known for their strong financial condition. In fact, credit unions are in the midst of one of their most successful periods ever.

Membership continues to increase. Capital ratios are at their highest levels ever. In simple terms, capital represents a credit union's net worth. Meanwhile, loan delinquency rates continue to drop. And the National Credit Union Share Insurance Fund, the federal fund that insures credit union deposits, continues to be the strongest deposit insurance fund in the nation.

Why Credit Unions Are - And Should Remain - Tax Exempt

Credit unions have always been exempt from federal income tax because legislators recognized that credit unions are mutually owned organizations operated entirely by and for their members. Moreover, credit unions are not-for-profit, democratically controlled cooperatives that have no capital stock and rely heavily on volunteers. Congress encouraged the success of the credit union movement in order to bring financial services to people who were unable to obtain them elsewhere and to foster the development of a system of financial cooperatives that would serve as a valuable alternative to the traditional "for profit" banking system. Over the years, legislators have deliberated, reviewed and reaffirmed the tax-exempt status repeatedly because credit unions, while growing and changing, continue to operate in this unique way.

Taxation would not create a "level playing field."

Banks and their trade associations have attacked credit unions' tax-exempt status. They argue that all financial institutions should operate on a "level playing field," which they define as all institutions paying federal income tax.

However, the structure of credit unions and banks is fundamentally different, so taxing credit unions would not make credit unions and banks "level."

As previously mentioned, credit unions are mutually owned cooperatives. Once expenses are paid and reserves are set aside, credit unions return any profits to their members in the forms of lower loan rates, higher savings rates, and new and improved products and services.

And, since credit unions earn no profit, taxes would come out of the reserve cushion they are required to maintain for unexpected downturns in the economy or unpredictable changes in the marketplace. In turn, credit union managers would be pressured to eliminate free and unprofitable services, such as small loans (which most other financial institutions won't make), financial counseling and small share draft/checking accounts.

If banks want to create a "level playing field," they should stop paying their boards of directors, stop generating profits for a relatively small group of stockholders, and start giving their customers authority to participate in their governance.

The tax exemption has nothing to do with a credit union's size, the services it offers or the members its serves. Credit unions deserve their tax-exempt status because of their not-for-profit, democratically controlled cooperative structure.

All consumers benefit from credit unions

Banks want to eliminate credit unions' tax-exempt status because they know it would eventually mean the end of credit unions as they are known today. In short, they are trying to do away with their competition.

If banks win, everyone else loses. Credit union members aren't the only ones who benefit from the credit union alternative. All consumers benefit from having credit unions. They keep banks and thrifts "honest" by forcing them to gauge their own rates and services to their credit union competition.

You can help maintain credit unions' tax-exempt status

Those of us who are credit union members know how our credit unions will go the extra mile to help a member. The Indiana Credit Union League (ICUL), other state leagues and the Credit Union National Association (CUNA) share these "good news" stories with lawmakers to help them understand how credit unions' unique structure and philosophy help improve the lives of consumers.

You can help by sharing your own "good news" stories with us. Tell us how your credit union put its People Helping People philosophy to work to help you. We won't use your name when we pass along your story to lawmakers unless you give us permission to do so. Send your "good news" story to the Indiana Credit Union League at or mail it to us at P.O. Box 50425, Indianapolis, IN 46250-0425

(Note: Federal credit unions — those chartered by the National Credit Union Administration, an agency of the federal government — are exempt from all income taxes. State-chartered credit unions pay state income tax.)

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