Money and Stuff

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A matter of interest

You may have noticed that when you receive credit unions statements or read about OAS FCU’s accounts, you earn dividends on your share (savings) accounts. And yet, when you take out a loan, it is offered to you with a specific interest rate.

Why does the Credit Union make the distinction? After all, the dividends we all earn on our accounts are calculated based on an interest rate.

The difference in these two terms has to do with the way Credit Unions are organized. You

have heard by now that when you join a credit union, you become a member-owner; your initial deposit includes a ‘share’ in the credit union. In OAS FCU’s your share is that $5 that is held in your regular share account (01) from the moment you start your membership and open the account. The day you choose to leave the Credit Union, they will give you the $5 back, and you will no longer be a member-owner.

When you deposit money in a savings account at a bank, you aren’t investing there, but

rather ‘lending’ your money to the bank. Therefore, what they pay you as compensation for being allowed to use your funds is a straight interest rate. Also, keep in mind that while banks are allowed to use a percentage of your deposited funds to invest, their greatest source of financing comes from raised capital that was obtained from the sale of stock.

Credit unions aren’t businesses; they do not issue stock to raise capital. The most basic explanation is this: in a credit union, net earnings come from the difference between what members pay on their loans (that interest rate) and the dividends they give members on deposits. A credit union is also entitled to invest some of the funds that are not lent to members, but with limitations. They make no profits because they are not for profit organizations, like banks are.

When you deposit money at a credit union, every bit that you place there is placed in trust, and the credit union is aware of it: you’re an owner trusting them with your money. Hence, the moneys paid to you and other members, the return rate on savings, club accounts and share deposits are termed dividends. Because it is part of the money earned, divided among all those who have funds deposited, in the form of an interest rate; it’s calculated and paid out based on each member’s respective balance. Dividend comes from the Latin word that means “dividing”.

When credit unions have extra reserves or higher-than-usual earnings, they may also choose to distribute extra earnings to their members in the form of (yes, you guessed it) a

bonus dividend, often done at the end of the year. Those dividends are also calculated on members’ balances over the year.

It may be a matter of semantics, but this metaphoric dividing and sharing of the pie is part of the cooperative philosophy, what makes credit unions (a type of cooperative) unique. It’s what makes credit unions into shared enterprises, organizations created for the sole purpose of helping people.