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How Financial Institution's Work, and Are They Working With You?

By VerityCU October 06, 2021 Financial education

Banks and credit unions have been promoted as being entirely different from one another. While it’s true the goals and motivations are very different, the way they operate is similar. Movies and TV have given some people the vision that when you deposit cash at a financial institution,  it goes into the teller drawer and at the end of the day it goes into a huge vault and sits there until you come back to withdraw it. Well that’s not how it really works, unfortunately. The balances held in deposit accounts (checking and savings, for example) are used to fund other products the credit union or bank offers. When others need help financing a new car or when someone is looking to buy a home the funds you put into your account can help finance these loans and opportunities.

Since your money is circulating to help others, you may wonder what happens when you want to make a withdrawal. When you see the balance in your account, that electronic record denotes how much money you have put into the financial institution. Even though there isn’t a Money-Pit-style-vault where all of the cash for everyone is stored, you are guaranteed your money through insurance protections. Most credit unions and banks are federally insured, but there are limits. Banks are insured by the FDIC, or Federal Deposit Insurance Corporation, and credit unions are insured by the NCUA, or National Credit Union Administration. Each guarantees the member/customer up to $250,000 of their deposit account funds. There are some scenarios where you can be insured for more, but before assuming you are fully covered be sure to speak to your local branch representative.

So how do financial institutions make money in order to pay for staff and facilities? When they help finance opportunities for people, they charge an interest rate on the loan where that goes back into the “pool” for when you come to withdraw the money you once deposited. Interest rates and fees are charged for certain situations like over drafting your checking account. All this adds up and allows the financial institution to grow capital.

What makes credit unions different than banks? As you know they operate the same when it comes to depositing funds and using those funds to help with loans. In this “pool” of funds sometimes you have more deposits then loans needed, which leads to lower interest rates. When there is this surplus, banks will take this and invest the funds toward stocks and projects that offer a high return, sometimes at the expense of the environment or social equity. Credit unions however, generally take the surplus and reinvest it into their communities by donating it to specific non-profits or creating products that support the planet and social equity, like loans for solar panels or affordable housing projects. So, when you are looking to join a new financial institution, make sure you know what your money is doing while you sleep. While you are researching, check out what Verity Credit Union does to help the local community, and our planet.