Credit Unions

Description and History

Credit unions are member-owned, nonprofit financial institutions that provide financial products (i.e. loans, mortgages, lines of credit, certificates of deposit, or CDs) and services (e.g. financial literacy education) to a specific group of people linked by a common feature (e.g. geography, employer, or other organizational affiliation). 

The credit union movement began in New England in the early 1900s, but credit unions were not federally recognized until 1934 with the passage of the Federal Credit Union Act, or FCUA, one of several New Deal era responses to the Great Depression to better support “people of small means” (NCUA n.d.). Today, there are over 4,000 federally insured credit unions in the United States, managing assets of $2.22 trillion. Over one third of Americans belong to a credit union (NCUA 2024). 

Unlike commercial, for-profit banks, credit unions are distinct in a few ways (NCUA n.d.): 

  • They are member-owned, not shareholder driven. Credit unions are financial cooperatives, operating on a “one member, one vote” system, meaning that the needs of members are primary to the profit-driven interests of shareholders. 

  • They are not-for-profit. This means that the profits they make are recycled and reinvested in their members, instead of being maximized for shareholders. For consumers, this means lower fees on credit cards or mortgage closing costs, better interest rates for savings accounts and CDs, and lower interest rates for loans (Adam 2023). 

  • Because many credit unions themselves are local businesses, it is in their best interest to support other businesses in their community. 

According to a 2021 FDIC national survey, 4.5.% of US households were unbanked, and 14.1% underbanked, largely in low income communities of color.

In the face of this reality, credit unions answer the call for a more equitable banking system in larger numbers than commercial banks. Most notably (DuPlessis 2019): 

  • There are more credit union branches in low- and moderate-income areas compared to traditional banks. 

  • More credit union (versus bank) loans are made to low-income families. 

  • More credit union (versus bank) loans (including mortgages) are made to families of color. 

  • There are three times more credit union minority depository institutions (MDIs)—a financial institution where more than half of member-voters are from low-income, communities of color OR a majority of the governing board is represented by a minoritized community, serving low-income and/or communities of color—than bank MDIs (Adam 2023).

Credit Unions, Locally Rooted Finance, and the Community Wealth Building Wedge 

Beyond the individual and household benefits of credit unions, some argue that “credit unions provide a historically proven mechanism for collective resistance to marginalization by racial capitalism” (Pavlovskaya et al. 2019). Essentially, credit unions can be a key element of locally rooted finance that resource critical community wealth building efforts across both land and labor. One example of this cross pollination is the role credit unions have played in decarbonizing the economy. According to Inclusiv, a CDFI intermediary that supports low- and moderate-income communities to access credit unions, approximately 300 credit unions in the United States have some kind of green loan product offering. In another survey of 30 credit unions, Inclusiv found more than $1 billion in green loans already deployed for individual households (i.e. weatherproofing), small businesses (e.g. solar panels), and communities (e.g. electric vehicles and e-bikes) (Abello 2023).

Examples

Self-Help Credit Union

One of the success stories of the solidarity economy movement is Self-Help Credit Union. Chartered in 1983, Self-Help takes a holistic approach to community support offering affordable loans to low-income families for child care to schooling to housing and business loans backed by the Small Business Administration for small- and medium-sized local businesses—including cooperatives. In 2022, 82% of SHCU’s loans were made to low-income borrowers, 90% to people of color, 24% to individuals in rural areas, and 39% to women (Self-Help).

Lower East Side People’s Federal Credit Union

Another credit union tackling the inequities in the banking system is the Lower East Side People’s Federal Credit Union in New York City. When the last bank branch closed in the heart of the Lower East Side in 1986, activists founded LES People’s FCU to support the now unbanked residents of their neighborhood (Elbech 2019). LES People’s FCU is the first community development financial institution (CDFI) in the country, a designation “which allows it to gain access to certain funds to provide services to underserved communities, as well as exemptions from regulations that limit a credit union’s business loans to 12.25 percent of overall lending” (Savitch-Lew 2015). Aside from supporting small businesses in a rapidly gentrifying area of the city, this credit union provides loans to develop and expand housing cooperatives in the area as well as zero interest loans to immigrant youth in the city who are applying for Deferred Action for Childhood Arrivals (DACA) (Moskowitz 2018). 

Challenges & Limitations

Despite their storied history of supporting low-income communities of color, many argue that credit unions are simply tinkering at the edges of capitalism and, often, Band-Aiding structural inequalities (Savitch-Lew 2015). 

Indeed, from a numbers perspective, commercial banks still hold a much larger share of overall assets in financial institutions: $23.4 trillion to be exact (FDIC 2024). Credit union assets account for a mere tenth of that number. Increasing those assets can prove tricky, especially because their tax exempt status means they cannot raise equity in a public offering, so they must rely on their membership—many of whom represent low-income communities—to raise capital internally (Abello 2022). Further, in recent decades, there has been increasing backlash from commercial banks against credit unions. Mired in legal battles, credit unions are sometimes too overstretched to maximize their tax-exempt status to advance community and economic development (Emmons and Schmid 2003). 

In one analysis of Bronx-based Bethex FCU, James DeFilippis argues that because credit union membership has expanded so rapidly and is no longer as connected to place as it once was, the ethos of participatory democracy and economies of place upon which these institutions were founded is not necessarily practiced (2001).

Taking It Forward

From a community wealth building perspective, we know that an element—even one as democratic and participatory as a credit union—can not work in a vacuum. It must be part of a larger community wealth building ecosystem. Excitingly, many of these financial institutions and their associations are working hard to advance their reach. From increasing federal and state funding for credit unions and other MDIs to expanding their homeownership, business lending, and climate finance programs, groups like Inclusiv are committed to working toward a just, cooperative financial system (2024).  

Others are working to expand the collaboration among different types of cooperatives (e.g. worker-owned businesses, community land trusts, etc.), adding credit unions to the mix. “Recently, the New York City Real Estate Investment Cooperative, a new group that seeks to take land out of the private market for community use, banked over $3,000 at Brooklyn Cooperative FCU,” cites Savitch-Lew (2015). 

Additional Resources