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How Credit Unions Work

        Money | Banking & ATMs

Modest Beginnings: the Birth of Credit Unions
An REA (Rural Electrification Administration) Co-Operative in Rush County. The REA is part of the New Deal legislation passed by the government of Franklin Delano Roosevelt.
An REA (Rural Electrification Administration) Co-Operative in Rush County. The REA is part of the New Deal legislation passed by the government of Franklin Delano Roosevelt.

The idea for credit unions came about in late 19th century Europe as part of the emerging cooperative movement. Cooperatives are voluntary, self-governed associations of people that work together for a common goal. The first cooperative was founded in 1844 by a group of workers in Rochdale, England. The Rochdale Society of Equitable Pioneers, as the group was known, pooled a pound from each member to open a cooperative store that sold butter, sugar, flour, oatmeal and candles.

The cooperative movement evolved into the idea of pooling member money to offer credit to individuals. The first official credit unions were founded in Germany in 1849 to save poor urban workers from resorting to loan sharks for financial help. In North America, the first successful credit unions were founded in Canada at the turn of the 20th century.

America's first credit union opened in Manchester, N.H., in 1909, but the movement really owes its early success to the work of Pierre Jay, the Massachusetts banking commissioner, and Edward Filene, a Boston businessman. Jay and Filene fought for legislation legalizing credit unions at the state level. Beginning with Massachusetts, they established credit union laws in 15 states by 1925.

Credit unions took on a new significance during the Great Depression. In 1934, President Franklin D. Roosevelt signed the Federal Credit Union Act into law. The law established a nationwide credit union system, overseen by the federal government, to help citizens with small incomes get credit for "provident purposes."

The Credit Union National Association (CUNA) was also formed in 1934 as a national organization overseeing the many existing state credit union leagues. Right after World War II, there were fewer than 9,000 credit unions in the United States. But by 1969, there were 23,876 [source: CUNA]. Due to consolidation and mergers, there are currently around 8,500 credit unions in the United States.

In 1970, the U.S. government formed the National Credit Union Administration (NCUA) to regulate all federal credit unions. The NCUA enforces operating rules on all federally chartered credit unions. The NCUA also manages the National Credit Union Share Insurance Fund (NCUSIF) to insure individual credit union accounts up to $100,000. The NCUA sets a cap on credit union interest rates for certain loans, but does not set specific interest rates -- that's up to individual credit unions.

The World Council of Credit Unions (WCCU) was also founded in 1970 to serve the ever growing international community of credit unions. Today, the WCCU has member credit unions in 97 countries, where it helps support 46,000 local credit unions through development and training [source: WOCCU].

Next, we'll look at the differences between two of the most common credit unions and where, exactly, you fit in.