Credit unions aren’t just an oasis for those struggling to qualify for high street borrowing. As community co-operatives, they can also appeal to those who want to benefit their neighbours.
And while savings rates are extremely low, credit unions can sometimes beat high street rates. This Q&A guide tells you how to find a union near you, how safe they are and when to use one.
In this guide
Q.What are credit unions?
a.Traditionally, credit unions have been small, non-profit financial organisations set up by members with something in common to benefit their community.
That common factor may be living in the same town, working in the same industry (eg, the Police Credit Union) or belonging to a particular trade union.
Many credit unions are rapidly professionalising. Many now offer savings and loans online, and most have some form of commercial premises, having moved away from the man and his ledger in the church hall collecting savings and offering loans.
There are now around 500 credit unions in the UK. Primarily they offer savings and loans to their members, though many now offer current accounts, and a few even offer mortgages. Almost a million Brits are members and this number is increasing.
Q.Who are they for?
a.They’re there to provide a financial community, where its members mutually benefit as there’s no profit for third-party shareholders.
This can mean helping those who can’t get access to ordinary bank products; a lifeline in less well-off communities for folks grappling with their finances. Plus, they can be a welcome alternative to payday loans or doorstep lending.
Yet, they're not just for those struggling financially. They also appeal to those who want to bank ethically and benefit their community. Some larger credit unions, such as the police union or London Mutual Credit Union, offer products that can beat mainstream finance.
Their primary functions are savings and borrowing, although other services that may be available include current accounts (similar to a Basic Bank Account), cash ISAs, mortgages or sometimes funeral plans. For more on their role see the credit union trade body ABCUL.
Q.Who can join a union?
a.They’re all specific, so you need to check if there’s one that suits you in your area.
From Jan 2012 onwards, the joining rules relaxed a little, but generally, to be part of a credit union, you need to share a ‘common bond’ with other members, such as:
Live or work in the same area
Work for the same employer as other members
Belong to the same church, trade union or other association
Organisations, as well as individuals, can now join up
Q.How do I find my nearest?
a.There are a few ways to find a credit union near you and check out precisely what your local credit union offers:
Search 450 unions online. Use ABCUL's Find Your Credit Union website, which does exactly what it says on the tin. You can search by postcode, employment type, or other organisations that you think may have a union.
Over the phone: If you'd prefer, you can call ABCUL on 0800 015 3060.
Local searches: Other online tools include the ACE Credit Union Services, Scottish League of Credit Unions and Northern Money (which covers Northumberland, Tyne & Wear, Durham, Tees Valley and Cumbria) databases.
You can also try your Yellow Pages or ask at your local Citizens Advice bureau for contact details.
Some of the bigger credit unions are:
London Mutual Credit Union: For those who live or work in the boroughs of Camden, Lambeth, Southwark & Westminster. London Mutual Credit Union
Leeds City Credit Union: Open to anyone who lives or works in the Leeds metropolitan area Leeds City Credit Union
Kent Savers: Open to anyone who lives or works in Kent. Kent Savers
Glasgow Credit Union: For those who live or work within Glasgow or the 'G' postcode area. Glasgow Credit Union
Transport Credit Union: Major transport companies such as First Group and Virgin Trains. Transport Credit Union
NHS Credit Union: For those who work for the NHS, or family members who live in the same household, in Scotland or the north of England (North East, North West and Yorkshire & Humberside). NHS Credit Union
My Community Bank: For those who live in the London Borough of Brent and for those who are members of associations concerned with the culture, cuisine, finance or welfare of the South Asian community in the UK. My Community Bank
Once you’re a member, you can become involved in decision making by attending AGMs or other member meetings. Some of the smaller ones may also be looking for help to run it.
You can also usually stay in the union if you're not in the bond anymore, for example if you move house or job, although the smaller unions may not have the resources to be able to deal with this.
Can’t find a credit union that fits?
If you feel like dedicating time and effort, then you can always set up your own credit union. It won't be quick, it usually takes up to three years and there are strict procedures to follow. See the ABCUL guidance for more info.
Q.How do they work?
a.Credit unions aim to help you take control of your money by encouraging you to save what you can, and borrow only what you can afford to repay.
In essence, they're savings and loan co-operatives, where the members pool their savings to lend to one another and help to run the credit union.
This is done in a ‘not-for-profit’ way, so the cash is only used to run the services and reward the members, and NOT to pay outside shareholders, like most other financial institutions.
Throughout the year, those running credit unions must put aside enough money to ensure they don’t go bust. Any money that’s left over is channelled back to those who’ve a savings account (to pay them interest) or it’s used to try and improve the overall service.
To keep all the money safe, credit unions can’t lend out all their members’ savings or plough the remainder into anything that carries too much risk. All money in savings with credit unions has the same FSCS Government protection as bank savings accounts.
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Q.What products do they offer?
a.Most credit unions don’t offer rates for larger loans, or savings, that will trouble the best-buy tables - but some do so it's worth checking. And by putting money in there, you’re actually helping others in your community.
If you’re after top paying savings, or have a reasonable Credit Rating and want to borrow cheaply, then never take out a product without first comparing it to the those in the Top Savings or Cheap Loans guides.
Products on offer include...
Loans: Most credit unions come into their own for loans of smaller amounts, under £3,000. Many people who borrow these amounts would otherwise only be able to resort to doorstep lending or payday loans as an alternative. Compared to those, credit unions have halos. See the loans section below for more info.
You can also use the loan to buy white goods via Co-operative Electrical. Another way to buy electricals is via the Smarterbuys scheme. This is a collective buying project that allows you to pay for goods by Paypoint, or a credit union loan, as a way to avoid payday loans, weekly payment stores or loan sharks.
Savings and bank accounts: All unions offer some form of savings account and around 25 now offer current accounts. See the savings section below for more info.
Mortgages: These are only offered by a few credit unions, Glasgow, Scotwest & Capital Credit Unions (all in Scotland) and No 1 Copperpot Credit Union (for police staff). Rates are competitive at higher loan-to-value ratios, but are not best buys compared with banks and building societies.
Prepaid cards: Around 40 unions around the UK offer a prepaid card service. See the Prepaid Cards guide for how the cards work.
It's not just about the products
One of the main objectives of a credit union is: "The training and education of the members in the wise use of money and in the management of their financial affairs."
While not all are able to provide a structured programme about budgeting or debt management, all are involved in helping to improve the financial literacy of their members (we're proud the MSE Charity is able to help fund some of these projects).
Projects which may be available include budgeting accounts, where you pay in a fixed amount each week or month which is used to pay agreed household bills on your behalf, or 'benefits direct accounts', where your benefits are paid directly to the credit union and you can withdraw cash needed for day-to-day spending.
Q.How do credit union loans work?
a.A key appeal of credit unions is a willingness to make small loans of £50 to £3,000, which most high-street banks won’t do. They're a much cheaper alternative to payday loans, and some credit unions can even get cash to you the same day.
In the old days, a credit union kept a strict rule that it would only lend to those who already had savings but this is changing: some will now lend to those who are new to the organisation.
What’s the interest rate?
This is a bit of a “how long is a piece of string?” question. Sometimes loans can be under 6% a year, but the interest is usually around 12.7% APR (1% a month) going up to a maximum 26.8% APR. If you borrow £100 over a year, at most you’ll repay £127(ish).
As noted, these rates are higher than the cheapest Credit Cards or Loans. But they're MASSIVELY cheaper than the products offered to those who are usually turned down for loans from high street banks, when rates can be 200% or more.
|Amount borrowed||Typical (APR 12.7%)||Maximum (APR 26.8%)|
There aren’t any repayment penalties
Credit union loans usually carry NO hidden charges or penalties if you can pay off the loan early. Life cover is included in the loan at no extra cost so if you die before paying off the loan, the credit union's insurer would repay the loan for you.
How long can I borrow for?
The vast majority of credit unions will give you money for a personal loan for up to five years and up to 10 years for a loan secured on your property (meaning if you can’t repay, it has a claim on your home).
Some credit unions have also started to offer payday-style loans, meaning you can take £100-500 over a month, or a few months. But the big difference is that while the payday lender has a representative APR of 1,000%+, the credit union's maximum APR is 26.8%
Like a regular bank, much also depends on YOU. You could find that some credit unions will insist you regularly save for several months first, to ensure you remain committed, or make checks to be sure that you have enough to be able to pay all your other bills as well repay a credit union loan.
As an alternative to a credit union, you may find a Community Development Finance Institution is able to help you with a small loan.
Q.How do bank accounts work?
a.If your union provides a bank account facility, it operates very much like a Basic Bank Account. Credit unions' current accounts are most often provided by the Co-operative Bank.
Most credit union accounts will charge you for the account - this is to cover costs, as they are not-for-profit entities. The charge should be no more than £1.50 a week. The charge also means that you don't pay fees for paying late/making an error.
Otherwise, credit union bank accounts generally operate like any other bank account. You can have your salary paid in, set up direct debits and standing orders from the accounts, take money out at cash machines, and some will issue debit cards so you can use them in stores.
However, you won't get an overdraft. Plus most aren't set up to offer chequebooks so if this is what you need, you're better looking on the high street.
The other thing you won't get from a credit union bank account is the seven day switching guarantee that high street banks offer. This is a voluntary standard and credit unions are not signed up. But you can still switch your bank account to a credit union account - it's just likely to take up to a month to complete the switch.
Q.How do credit union savings work?
a.These tend to be ultra-flexible, allowing you to save large or small amounts weekly, monthly or whenever you can. Bigger credit unions may have online banking meaning you can pay in online, and have branches and collection points such as local post offices; some smaller unions will have just a couple of opening hours a week and likely be based in a community centre or church hall.
Credit union savings usually offer a dividend rate rather than an interest rate. This means that it depends how well the credit union does that year - so you don't know what you'll get until the end of the year. Typically, dividend rates are 2 or 3%, but it could be as low as 0% or as high as 8% of the sum saved.
But as dividends are paid before tax, it is up to the you to declare tax on any earnings, although your union will help with the paperwork.
Some recent dividend rates that beating high street savings rates include:
Glasgow Credit Union: For those who live or work in the 'G' postcode area. Divident levels are 3%-3.25% on its savings products, which include a regular saver. You must commit to save at least £10 a month to join. Glasgow Credit Union
Somerset Savings & Loans: For those who live or work in Somerset (in certain postcode areas). Offers 2% dividend on its savings account. Membership of the union costs £2.50 and minimum deposit is £10. Somerset Savings & Loans
Check your local credit union: Use ABCUL's Find Your Credit Union website to find your local union and what it's offering for its savings accounts.
Some credit unions, usually the larger ones with thousands of members, now offer accounts with advertised interest rates, like bank savings accounts. You can identify these as they'll have a rate, and it'll say "AER" (Annual Equivalised Rate) after it.
Most credit union savings accounts aren't table topping, but My Community Bank credit union, which is nationwide, has launched two fixed rate bonds (1yr & 3yr bonds) which beat all high-street rates. There's also a two year fix, but this can be beaten by top savings.
To join My Community Bank, you either need to live in the London borough of Brent, or to support the South Asian community in the UK.
And it's this second bond that allows it to be nationwide. It's open to all who are members of associations concerned with the culture, cuisine, finance or welfare of the South Asian community in the UK.
This common bond can be displayed by being a member of a curry club, for example, or by donating to a charity helping the South Asian community in the UK. The common bond will be reinforced once you've joined as My Community Bank donates on its members' behalf to the British Asian Trust.
Savings accounts offered include:
- One year bond - 2.15% AER (minimum deposit £1,000, max deposit £15,000) - My Community Bank One Year Bond
- Two year bond - 2.25% AER (minimum deposit £1,000, max deposit £15,000) - My Community Bank Two Year Bond
- Three year bond - 2.75% AER (minimum deposit £5,000, max deposit £15,000) - My Community Bank Three Year Bond
Residents of Somerset can benefit from a bond which targets a 3% return (though this is a dividend so is not guaranteed):
- Member's Bonus Bond - 3% (targeted dividend) (minimum deposit £2,000, max deposit £15,000). Requires 90 days notice for withdrawals, interest paid annually
Somerset Savings & Loan Member's Bonus Bond
Can't join any of these credit unions? Use ABCUL's Find Your Credit Union website to find your local union and what it's offering for its savings accounts.
Some credit unions now offer cash ISAs as part of their savings range. A Cash ISA is like a savings account, except the saving is tax free, and there's a limit to how much you can save each year (currently £5,760). For more information on ISAs, read the cash ISA guide.
Some credit unions offer cash ISA accounts which beat anything offered on the high street. A selection of those unions is below, but check your local union for what it offers:
London Mutual Credit Union: For those who live or work in Camden, Lambeth, Southwark or Westminster. Offers 3% AER (fixed until April 2014) on its cash ISA. The ISA has instant access with no withdrawal penalties. Must have £5+ in a Share1 Account with the union, and pay a £2/yr membership fee. London Mutual Credit Union
No1 Copperpot Credit Union: For serving/retired police officers, PCSOs, Specials & police staff & families (Eng & Wales only). Offers 2.7% AER (variable) on its cash ISA. You must save £5+/mth into a "Member Account" No1 Copperpot Credit Union
Erewash Credit Union: For those who live or work in Derbyshire. Offers 2.5% AER on its cash ISA. Membership of the union costs £3. Erewash Credit Union
Can't join any of these? Use ABCUL's Find Your Credit Union website to find a credit union you can join.
How do I pay in/withdraw money?
You can pay in at the local credit union office, or sometimes through a post office. Some accept BACS or debit card payments. If you're with one of the employment-linked unions, you're often allowed to save direct from your payroll, which makes the process much easier.
Withdrawals can be made directly at your local credit union office, by cashing a cheque at a post office, or, with some of the larger unions, with a debit card from an ordinary high street cash machine. The larger credit unions now allow online withdrawals to a specified account.
Any other benefits?
Life savings insurance is included with most savings accounts, at no extra cost. If you die your savings can be as much as doubled by the insurance and paid to whoever you choose. Further details on this are available from the individual credit unions.
Q.How safe are savings in a credit union?
a.Credit unions are small organisations and lack the enormous amounts of money of the big banks. On the other hand, regulations mean they must be far more prudent and not over-lend.
As with any type of savings, the most important thing to consider is “in the event it went bust, am I protected?” The answer is yes.
Credit union savings have exactly the same protection as normal savings accounts; in other words, the Financial Services Compensation Scheme will pay back £85,000 per person, per institution. In any case, many credit unions limit the total you can save with them to £10,000.
For more info see the Safe Savings guide.