What are credit unions?

Credit unions, although not widely publicised, are an alternative to banks, building societies and doorstep/payday lenders.

They offer a range of savings accounts, current accounts and loans to their members.

A credit union is a form of co-operative. It's "run by the members, for the members".

Credit unions are not-for-profit, and are formed by people who have something in common. This 'common bond' could be the same:

• Locality
• Industry (the police have a credit union for instance)
• Trade union, club or church

You can only join a credit union if you meet its eligibility criteria. Usually this means that you must share the same common bond with the other members.

In 2012, credit unions became free to extend their memberships beyond those that have a common bond, but you should still check eligibility criteria as this is a choice, rather than an obligation.

Credit unions are authorised and regulated by the Financial Conduct Authority (FCA), meaning that they are also covered by the Financial Services Compensation Scheme (FSCS).

The FSCS will protect the first £85,000 that each individual has with a credit union.

Broadly speaking, credit unions offer three main types of financial product: current accounts, savings accounts and loans.

Current accounts

• Some credit unions provide a kind of basic bank account. They don't offer an overdraft or a chequebook, so you can't get into debt.
• You get an ATM/debit card (usually a Visa debit card and access to the LINK network of cash machines).
• They offer the ability to set up direct debits and standing orders, and to have your wages, pension or benefits paid in directly.

Savings accounts

• The savings accounts offered by credit unions are essentially ethical accounts, whereby your deposited money is lent to other members in your credit union.
• You have the flexibility to save how much you like, when you like.
• You can make deposits in branch, in certain shops, collection points or by direct debit. You can even save directly from your wages!
• Until 2012, credit unions paid a dividend, not savings interest. They now have the option to pay interest although many still choose to pay a dividend.
• Some credit unions include built-in life insurance. This means that if you die your savings are doubled and can be paid to a person you specify (subject to certain terms and conditions. Check with the individual credit union to find out more).

Loans

• Credit unions offer loans to members only. Some may accept an application from a new member, but others will insist that you save with the union for a set period of time before being eligible to borrow.
• As well as offering bigger loans, they can lend smaller amounts than a bank or building society, more akin to the amounts lent by a doorstep or payday lender.
• Interest rates can vary, but are capped by law at 42.6% APR, which is considerably less than many short-term loans, including a payday loan.
• No charges for early repayment.
• Credit unions can offer secured loans for larger amounts and longer terms.
• Life insurance is built-in so that if you die, the loan is fully repaid.