Credit Unions Help Build More “Wonderful” Financial Lives
As George Bailey learned in “It’s a Wonderful Life,” it can be hard to quantify just how much impact one person has on the world. But financial institutions deal in something measurable: money. What if an entire category of organizations, like credit unions, ceased to exist?
If regulatory change or an economic shift wiped these not-for-profit cooperatives off the map, it’s unlikely that communities like the movie’s Bedford Falls would turn into Pottersvilles, as in the film. But it might leave millions of Americans a little poorer.
Credit unions save consumers a significant amount of money — $352 million annually in Oregon and Washington alone, according to a 2014 study by ECONorthwest, a consulting firm. That amounts to about $63 per customer in Oregon and $76 in Washington, says Mike Wilkerson, the company’s Portland-based senior economist. Nationally, the average credit union member saves $74 a year, according to the Credit Union National Association.
The savings come from higher returns on account balances and lower interest rates on loans, particularly for autos and credit cards, says John Worth, chief economist for the National Credit Union Administration, a federal regulatory agency. Credit unions can offer more-competitive rates because as member-owned institutions, they don’t need to generate earnings for stockholders. And their not-for-profit status means they’re tax exempt, which reduces costs compared with banks.
Passing along savings
“Credit unions are able to pass a great deal of that advantage on to their membership,” Worth says.
Aside from direct benefits to members, Worth says credit unions also benefit the broader community because they force banks to give customers better rates to stay competitive. “When credit unions are in the same markets as banks, banks offer better rates,” he says.
In many ways, banks and credit unions are similar. Both typically offer checking and savings accounts, and customer deposits are insured by federal agencies to equal levels. But at credit unions, customers become members who may be able to vote for directors and influence policy decisions. Bank customers only have the option of taking their business elsewhere if they disagree with management decisions.
Helping the underserved
“The majority of our members, about 66%, are low to low-middle income,” says Frank Cetera, president of Cooperative Federal’s board of directors. Many members have poor credit, or live in neighborhoods with few bank offices. “For those reasons, among others, they’re definitely underserved,” he says.
Like Cooperative Federal, some credit unions lend to people who can’t get loans from banks, helping these borrowers avoid predatory lenders.
“It is often true that credit unions have more flexibility and are more willing to work with their members,” Worth says. But in some cases, “doing what’s best for a member doesn’t necessarily mean giving them the loan.”
During the years that led to the subprime mortgage market meltdown in 2007, for example, many homebuyers with shaky financials were approved for loans and then were devastated after the crash when they were unable to keep their homes.
“Sometimes the right thing is to not make the loan,” Worth says.
Credit unions, for the most part, seem to be walking that line successfully. Worth says credit unions offered a consistent number of subprime mortgages before, during and after the financial crisis. Because most credit unions held true to their lending guidelines, they didn’t get into as much trouble as banks and finance companies, many of whom followed the subprime mortgage trend right over a cliff.
“That’s what you want,” Worth says. Lenders should “be available and in a safe and sound condition irrespective of the state of the economy,” he says.
Credit unions also appeal to consumers who want a more informal experience than banks may provide.
“I like the idea of cooperative ventures, and that’s what a credit union is,” says Steven Kanner, a graduate student and parent who lives in Cleveland Heights, Ohio. He enjoys chatting with the tellers when he goes into a branch to do his banking. He also appreciates that his money is helping local businesses and residents, “not flying out to distant lands to benefit a few shareholders somewhere else.”
So what would the world be like if credit unions didn’t exist? Economists have looked at the money members save, and extrapolated to see how much that increases their buying power and fosters economic development.
A 2014 study by the National Association of Federal Credit Unions suggests that just removing the tax exempt status of credit unions would reduce U.S. gross domestic product by $14.8 billion a year, and result in the loss of 150,000 jobs annually.
But for Worth, the real impact is at the household level. Credit union members “are getting good, high-quality financial services from organizations they can trust and organizations they can have some control over,” he says.
Like George Bailey and his customers in “It’s a Wonderful Life,” credit union members might be in for a rude awakening if their cooperatives suddenly ceased to exist.
This article originally appeared on NerdWallet.