A credit union is a cooperative financial institution that is owned and controlled by its members. Credit unions differ from other financial institutions (banks, savings and loan, etc.) in that the members who have accounts in the credit union are the credit union's owners.

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.

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.

Credit unions offer many of the same financial services as banks, 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, operated 'out of a shoebox', to institutions with several billion dollars in assets and hundreds of thousands of members

History

Credit union history dates back 1864, when Friedrich Wilhelm Raiffeisen founded the first credit union in Heddesdorf (currently known as Neuwied) in Germany. By the time of his death in 1888 credit unions had spread to Italy, France, the Netherlands, England and Austria, among other nations.

The first credit union in North America, the Caisse populaire de Lévis in Québec, Canada, began operations on Jan. 23rd, 1901 with a ten cent deposit. Founder Alphonse Desjardins, a reporter in the Canadian parliament, was moved to take up his mission in 1897 when he learned of a Montrealer who had been ordered by the court to pay nearly $5,000 in interest on a loan of $150 from a moneylender. Drawing extensively on European precedents, Desjardins developed a unique parish-based model for Québec: the caisse populaire.

In the United States, St. Mary's Bank Credit Union of Manchester, NH holds the distinction as the first credit union. Assisted by a personal visit from Alphone Desjardins, St. Mary's was founded by French-speaking immigrants to Manchester from the Maritime Provinces of Canada in November 1908.

Pierre Jay, a central banker and Edward Filene, a Bostonian merchant, were instrumental in establishing enabling legislation in Massachusetts in 1908.

Filene also created the Credit Union National Extension Bureau, the forerunner of the Credit Union National Association, which was formed as a confederation of state leagues at a meeting in Estes Park, Colorado in 1934. Attendees at the meeting included Dora Maxwell who would go on to help establish hundreds of credit unions and programs for the poor in her lifetime and Louise Herring, whose work to form credit unions and ensure their safe operation earned the title of “Mother of Credit Unions” in the United States.

In the same year, Congress passed the Federal Credit Union Act, which permitted credit unions to be organized anywhere in the United States. The legislation allowed credit unions to incorporate under either state or federal law, a system of dual chartering that persists today.

Early credit unions were viewed as the “poor man’s bank” because they would extend credit to people who otherwise would not qualify for credit. However, today, credit unions are no longer lacking in prestige and are used widely, for example, among university employees and large telecommunications corporations.

In the United States bank trade associations are opposed to the tax-free structure on earnings that credit unions enjoy and the American Bankers Association has identified the revocation of credit unions' tax-free status as topping its political agenda in 2004 and 2005.[citation needed] However, bank holding companies and their affiliates aggressively compete to provide services to credit unions through their ATM networks, corporate checking accounts, and Certificate of Deposit programs.