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Credit unions are member-owned financial cooperatives that operate on a not-for-profit basis, providing many of the same services as traditional banks. But unlike banks, credit unions are structured to prioritize the financial well-being of their members rather than maximizing profits for shareholders. Despite their not-for-profit status, credit unions still need to generate revenue to cover their operating costs and serve their members. So, how do credit unions make money? Let’s explore the key ways credit unions generate income while benefiting their members.

1. Interest on Loans

The primary source of income for most credit unions is the interest charged on loans. Credit unions provide a variety of loans to their members, including personal loans, auto loans, mortgages, and credit cards. When members borrow money, they repay the loan with interest, and this interest is a significant revenue stream for the credit union.

• Personal and auto loans: Credit unions often offer lower interest rates on personal and auto loans compared to traditional banks. While the rates are lower, credit unions still earn interest on these loans, which helps fund their operations.
• Mortgages: Like banks, credit unions offer home loans to their members. The interest earned from these mortgages provides consistent revenue over the life of the loan.

Why it works: Credit unions use the interest from loans to cover operational costs while offering competitive rates that benefit members. Since credit unions are member-focused, the profits from loan interest are often reinvested into better services and lower fees for members.

2. Fees and Charges

Credit unions also generate revenue through fees and service charges. While credit unions typically have lower fees than traditional banks, they still charge for certain services, which helps support their operations.

• Account maintenance fees: Some credit unions charge monthly or annual fees for maintaining checking or savings accounts. These fees are usually lower than those charged by banks, but they contribute to the credit union’s income.
• ATM and overdraft fees: Credit unions may charge fees for using out-of-network ATMs or for overdrafting an account. These fees are typically lower than those at banks, but they still help generate revenue.
• Loan origination fees: When a member takes out a loan, credit unions may charge a loan origination fee, which helps cover the administrative costs of processing the loan.

Why it works: By charging modest fees for certain services, credit unions can cover their operational costs while keeping fees lower than traditional financial institutions.

3. Interest on Investments

Credit unions invest their excess funds in low-risk investments, such as government securities, bonds, and other safe assets. The interest earned from these investments provides a steady income stream for the credit union.

• Government bonds: Credit unions often invest in U.S. government bonds, which offer low-risk returns. The interest from these bonds helps credit unions maintain financial stability while minimizing risk.
• Certificates of deposit (CDs): Some credit unions invest in certificates of deposit, which provide higher interest rates than traditional savings accounts. This generates additional income from the credit union’s reserves.

Why it works: Investing in safe, low-risk assets allows credit unions to generate additional income while protecting members’ funds.

4. Interchange Fees from Debit and Credit Card Transactions

Credit unions also earn money through interchange fees when members use their credit union-issued debit or credit cards. Every time a member makes a purchase with a credit or debit card, the credit union earns a small percentage of the transaction amount, known as an interchange fee.

• Debit card transactions: When members use their debit cards to make purchases, the merchant pays a small fee to the credit union, which helps fund the credit union’s operations.
• Credit card transactions: Credit unions that issue credit cards also earn interchange fees when members use their cards. These fees contribute to the credit union’s revenue while offering valuable services to members.

Why it works: Interchange fees are a relatively small but consistent source of income, and they help credit unions fund their services without relying solely on member fees.

5. Loan Servicing and Sales

Credit unions may also generate revenue by servicing loans or selling loans to other financial institutions. While many credit unions keep loans in-house, some may sell mortgages or other loans to larger institutions to free up capital and reduce risk.

• Loan servicing: Credit unions may continue to service the loan (collect payments and handle customer service) even after selling it, earning a fee for managing the loan.
• Selling loans: In some cases, credit unions sell loans to other financial institutions to manage their risk and liquidity. By selling loans, they can free up capital to offer more loans to members.

Why it works: Selling or servicing loans provides a way for credit unions to manage their financial risk while earning fees for loan management.

6. Membership Growth

Credit unions often benefit from membership growth, as more members mean more potential for loans, deposits, and transactions. Credit unions rely on attracting new members to maintain a strong financial base.

• Member deposits: Credit unions use member deposits to fund loans, invest in low-risk securities, and provide essential financial services. As membership grows, so does the potential for income from these activities.
• Cross-selling products: Credit unions encourage members to use multiple products and services, such as checking accounts, credit cards, and mortgages. The more products members use, the more opportunities the credit union has to earn revenue.

Why it works: As credit unions grow their membership base, they increase their potential for generating income through loans, fees, and investments, all while maintaining a member-focused approach.

Conclusion

Credit unions make money primarily through the interest earned on loans, modest fees for services, interest on safe investments, and interchange fees from card transactions. While their business model is different from that of traditional banks, credit unions still need to generate income to cover their operational costs and provide valuable services to their members. The revenue they earn is often reinvested into the credit union to offer better rates, lower fees, and improved services, benefiting all members of the cooperative.