What is a credit union?

What are credit unions?

Credit unions are a not-for-profit, financial co-operative. A credit union is owned and run by its members, for the benefit of its members (not for the benefit of external shareholders, for example).

Members of a credit union are typically joined by a “common bond”, such as:

• living and/or working in the same area
• working in the same industry or with the same employer (such as the police, fire service or the NHS )
• belonging to the same trade union , church or other organisation, for example.

There are approximately 390 credit unions in the UK, according to the Bank of England.

How do credit unions work?

When you join a credit union, you become a member of it. This may sometimes come with a small, one-off joining fee or an annual membership fee, which is typically less than £5.

Once you are a member of a credit union, you can access its services, including saving money with the organisation and, if necessary, borrowing money.

The money that members save is used to fund loans to other members.

Members get a say in how a credit union is run, including voting at the Annual General Meeting (AGM) and electing directors. They will also receive a share of any profits the credit union makes.

What services do credit unions offer?

Credit unions offer a range of financial services, including:

Savings accounts

Savings is a core focus for many credit unions, with most offering different forms of savings accounts to their members.

While the exact accounts available will differ between credit unions, there are usually easy access options that allow you to withdraw from your savings when you choose.

Several credit unions also offer specialist savings accounts, such as Christmas savers. These accounts aim to encourage you to save up over several months, so you have a pot of money at the end of the term to help pay for Christmas, for example. You will only be able to withdraw from your savings after a certain date, such as just before the festive season.

Credit unions may also provide savings accounts for children and young members to encourage regular savings habits.

Unlike standard savings accounts from other providers, many credit union savings accounts may not pay interest. Instead, you would receive a share of the profits each year, known as a dividend, which means the amount you earn on your savings can vary.

However, some credit unions do now offer accounts that pay interest, including fixed accounts that pay a guaranteed interest rate for a certain term.

Credit unions may allow you to save into an account in a number of ways, including Direct Debit, deducting a set sum from your salary or paying in money at a branch or collection point.

For savers looking to protect their savings from tax, some credit unions also now offer cash ISAs.

Loans

Credit unions offer a range of personal loans to their members, with the option to borrow as little as £100 to more than several thousand pounds.

There is a cap on how much interest credit unions can charge on their loans. This is set at 3% a month (or 42.6% APR) in the UK, except Northern Ireland where the limit is 1% a month (or 12.68% APR).

While those with a good credit history are likely to find more competitive interest rates from other providers, credit union loans can be a suitable option for those with a poor credit score who may struggle to access mainstream credit options. For these borrowers, credit unions can be a safer and more affordable alternative to payday lenders and loan sharks, for example.

To qualify for a loan, you may need to have been a member of a credit union for a certain length of time and deposited a minimum amount in a savings account. The amount you are eligible to borrow may also be linked to the sum you have saved with the credit union. However, other credit unions may be more flexible and allow you to join at the same time as applying for a loan.

As with any lender, a credit union will run some checks when you apply for a loan, including credit checks, and will only approve your application if it’s confident you can afford to make repayments.

Because credit unions want to encourage financial responsibility, some require you to add to your savings alongside your loan repayments.

Members who receive Child Benefit may also qualify for specialist family loans, or child benefit loans.

Life insurance

Credit union members with a savings account or loan will often receive free life insurance.

This means that the beneficiaries of a member could receive an extra cash payout, as well as the sum of money in the savings account, in the event of their death.

If the member had a loan, the life insurance will cover the debt left outstanding, so their beneficiaries won’t need to worry about repaying it.

While free life insurance can be a useful perk of credit union savings accounts and loans, it’s worth checking the terms of this cover so you know what is and isn’t included.

Current accounts

It may be possible to open a current account with a credit union, which would allow you to make and receive payments as you would with any other account.

For example, you could have your salary, pension and benefits paid into it, and pay bills, set up Direct Debits and standing orders and use a debit card for your spending. The exact features available may vary between credit unions.

It’s also worth noting that current accounts from banks and other providers may be able to offer more advanced features and services, such as an overdraft.

Mortgages

Some credit unions have started to offer mortgages.

But it’s important to bear in mind that these mortgages may not necessarily be the best deal for your individual situation, so it’s worth comparing other providers and speaking to an independent mortgage broker to discuss your options.

Is money safe in a credit union?

The Credit Unions Act 1979 first regulated credit unions in the UK, setting certain rules and standards that these organisations needed to meet.

All credit unions are now authorised and regulated by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), meaning that they are also covered by the Financial Services Compensation Scheme (FSCS). This is the same protection that banks, building societies and other providers offer.

The FSCS will protect the first £85,000 that each individual has deposited with a credit union, should something happen to the organisation.

Credit unions vs banks

There are several key differences between credit unions and banks.

Despite these differences, it’s worth underlining that banks and credit unions are both regulated by the FCA and PRA and offer protection via the FSCS.

Credit unions and building societies have more in common as they are both run for the benefit of their members. Furthermore, while many building societies are open to individuals across the country, they typically have their roots in a local area, similar to many credit unions.

However, credit unions typically set stricter criteria to join and are currently more limited in the products and services they can offer. Furthermore, they have to meet specific requirements that building societies don’t need to, such as not charging above a certain interest rate on their loans.

On the whole, credit unions specialise in savings and personal loans, while building societies are more focused on savings and mortgages.

How to join a credit union

To find a credit union that you’re eligible for, you can use the tool on Find Your Credit Union.

Once you’ve found one, you can join according to the organisation’s individual instructions and provide the information it requires. You may need to provide the credit union with some form of ID and proof of address to join.

You will often be able to join a credit union online. However, many credit unions allow you to get in touch by email, phone or by visiting their branch if you have any questions or want to join another way.