Federal Credit Union (FCU): What It Is, How It Works

What Is a Federal Credit Union?

A federal credit union (FCU) is a not-for-profit cooperative financial institution regulated and supervised by the National Credit Union Association (NCUA). A federal credit union is owned and controlled by members and offers banking and lending services and products. As of March 2024, there were 4,572 federally insured credit unions.

How a Federal Credit Union Works

Federal credit unions must be chartered by the National Credit Union Association to operate in the United States. A federal credit union is a financial cooperative that provides traditional banking services.

In 2023, three new federal credit union charters were granted (one fewer than the NCUA's target of four). It takes at least one year to complete the charter application process, and the NCUA recommends that new federal credit unions have a minimum of $500,000 in funding. This funding is used to cover start-up costs and any losses until the credit union becomes profitable.

Federal credit union deposits can be protected like deposits at federally-insured banks, which are insured through the Federal Deposit Insurance Corporation (FDIC). To obtain NCUA insurance, credit unions must be federally chartered, or be state-chartered while opting into National Credit Union Share Insurance Fund (NCUSIF) participation. There were 4,572 federally insured credit unions in the U.S. as of March 2024, managing around $2.31 trillion.

Ranging in size from small, volunteer-only operations to large entities with thousands of nationwide participants, credit unions can be formed by unions, large corporations, and other organizations. NCUA's membership is made up of both large and small credit unions.

Credit unions are created, owned, and operated by their members. As such, they are not-for-profit enterprises that enjoy tax-exempt status. As a co-operative, members of credit unions own shares. As of December 2023, the average dollar share per member was $13,506.

NCUA's activities include representing, informing, educating and assisting its members regarding industry issues. Headquartered in Arlington, Virginia, one of its primary purposes is to influence the laws and regulations affecting federal credit unions.

History of Federal Credit Unions

The first North American credit union was La Caisse Populaire de Levis (The People's Bank of Levis), established in 1901 in Quebec. By 1909, the idea had caught on in the U.S. as well. That year, the first U.S. credit union opened in New Hampshire, and the first statute establishing credit unions was enacted in Massachusetts.

Between 1921 and 1935, 38 more states and Washington, D.C. enacted credit union laws. In 1934, President Franklin D. Roosevelt signed the Federal Credit Union Act to promote a national system of cooperative, nonprofit credit unions.

This law allowed credit union organization under federally approved charters, encouraging savings while making credit widely available. Later that year, Texas-based Morris Sheppard Federal Credit Union became the first federally chartered credit union.

In 1970, Congress created an independent agency, the National Credit Union Administration, to charter and supervise federal credit unions. The same year, credit union members began to benefit from deposit insurance. The new National Credit Union Share Insurance Fund insured member share deposits for up to $20,000. This amount doubled to $40,000 by 1974 and increased to $100,000 by 1979. In 2008, President George W. Bush temporarily raised the insured amount to $250,000, and this level of insurance was made permanent in 2010 by President Barack Obama with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act.

After 1974, a multi-decade struggle ensued between credit unions, banks, and lawmakers over how credit union membership could be defined. In 1998, President Bill Clinton signed the Credit Union Membership Access Act, which offered various ways to qualify to join a credit union.

Frequently Asked Questions (FAQs)

The Bottom Line

Joining a federal credit union can be beneficial for people looking for good interest rates and lower fees, and for anyone who wants to support the credit union's financial education and community involvement. In addition, a federally insured credit union protects up to $250,000 of your funds in the event of credit union failure. However, qualifying for membership depends on a credit union's specific requirements. In some cases you must live in a certain region or work in a certain job, but many credit unions offer membership to anyone who makes a donation to a specified charity or organization.