A credit union is a cooperative financial institution that is owned and controlled by its members. Credit unions differ from banks and other financial institutions in that the members who have accounts in the credit union are the owners of the credit union.
Credit union policies governing interest rates and other matters are set by a volunteer Board of Directors elected by and from the membership itself. Only a member of a credit union may deposit money with the credit union, or borrow money from it. As such, credit unions have historically marketed themselves as providing superior member service and being committed to helping members improve their financial health.
Credit unions may be viewed as non-profit organizations, or alternatively as for-profit enterprises charged with making a profit for their members (who receive any profits earned by the cooperative in the form of dividends paid on savings, which are taxed as ordinary income, or reduced interest rates on loans).
This debate reflects credit unions' unusual organizational structure, which attempts to solve the principal-agent problem by ensuring the owners and the users of the institution are the same people. In any case, credit unions generally cannot accept donations and must be able to prosper in a competitive market economy.
In the United States, credit unions typically pay higher dividend (interest) rates on shares (deposits) and charge lower interest on loans than banks. Credit union revenues (from loans and investments) do, however, need to exceed operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency. Often credit unions have a lower cost of funds due to a higher proportion of non/low interest bearing deposits, than typical commercial banks.
Credit unions offer many of the same financial services as banks, often using a different terminology; including share accounts (savings accounts), share draft (checking) accounts, credit cards, and share term certificates (certificates of deposit) and online banking.
Credit unions exist in a wide range of sizes, ranging from volunteer operations with a handful of members to institutions with several billion dollars in assets and hundreds of thousands of members.