If you have never investigated how a credit union could help your finances, perhaps it is time to take a look.
These businesses are an alternative to banks and other financial institutions, and although they are seen as a lifeline for those who cannot get an ordinary bank account, they can offer competitive financial products to others as well, including market-leading rates.
‘Credit unions are the best-kept secret in financial services’ says Paul Norgrove, CEO of the Serve and Protect credit union. ‘We just don’t sell ourselves well enough.’
Robert Kelly, chief executive officer of ABCUL (Association Of British Credit Unions Limited), says that there has been a ‘wrong perception’ in the past that a credit union was a ‘poor man’s bank’. The reality is that’s not the case.
‘You might think there’s still a little bit of a stigma, but credit unions are offering competitive rates in terms of interest rates for savings and dividends, and there can be a really strong sense of cooperation and helping the community as well,’ he says. ‘People do deposit savings and get a good return.’
If you have never considered a credit union, you may have questions about what they do and how they can help you. Here are some answers to some of the most frequently asked questions.
What is a credit union and how does it differ from a bank?
You probably do not think of your bank as a ‘financial community’ but that is exactly what a credit union will encourage you to do.
Unlike banks, credit unions are member owned, not-for-profit and have amongst their guiding principles the need to promote thrift and savings and provide education as well as credit.
They provide a limited number of financial services, usually just savings and loans (although this is about to change), and only lend out what they borrow, rather than relying on complex financial instruments.
Can I join any credit union that I like?
Credit union members must have a ‘common bond’, and in practice this is usually location or occupation-based. So you usually can only join a credit union in your local area, or one that relates to your occupation.
Unlike banks, credit unions do not have to make a profit, which means that their rates can be competitive in some cases.
Most of the loans they make are small (below £3,000) and are often to those with poor credit histories. Loan rates usually compare well with doorstep lenders, and certainly with loan sharks, but less well with the loans offered to those with a high credit rating who want to borrow more.
For example, Lewisham credit union in south-east London offers loans at between 0.75% per month (9.4% APR) and 2% per month (26.8% APR) depending on the size of loan agreed.
The representative APR (annual percentage rate) of short-term credit provider Klarna is 18.9%, but loans from main-stream banks and other lenders such as the Post Office are available from 3%.
Other good things about credit union loans are that they usually include life insurance, so that they will be paid off if you die and not become a problem for your descendants, and that you can usually pay them off early without penalty, unlike many commercial loans.
In terms of savings, it can be hard to compare what credit unions offer, as most pay a ‘dividend’ based on the performance of the credit union that year rather than give an interest rate.
Some can be very competitive, however. The Serve & Protect credit union, for members of the fire, health, military, prison and police services, offers a 1.2% regular savings account and a 1% flexible saver with a maximum balance of £20,000, which beats pretty much anything else on the market.
‘We’re quite happy with that,’ says Paul at Serve & Protect, adding that the union was making a commitment to become more like a business in terms of rates and service.
Life insurance is also included with many savings accounts with credit unions, which could be helpful to your family at a difficult time, so this is an additional benefit.
Is my money protected?
Yes, your money is just as safe in a credit union as a bank. The Financial Services Compensation Scheme will pay you back up to £85,000 if your credit union goes bust, which is the same as if you had the money in a bank account.
Can I bank online with a credit union?
The answer to this depends on the credit union you join. Some are very forward-thinking and already have similar digital access to banks, with online transactions and even mobile phone apps, while others are still offering mainly branch-based transactions.
Robert at ABCUL says that there are moves afoot to modernise credit unions as quickly as possible. ‘We do need to continue with digital transformation.’
Reforms to the Credit Unions Act are due to widen the products that a credit union can offer, which should make them more like traditional banks, so there are likely to be more developments in terms of technology once this happens.
How do I pay in and withdraw money if there is no online service?
This differs depending on the credit union but there may be a local office, or you may use the local Post Office for transactions. Some even allow cash machine withdrawals. If you are with a credit union related to your employment you should be able to save through your payroll.
What about current accounts?
Most credit union accounts are for savings and loans, but it is possible to get a basic bank account with some unions. These accounts often offer debit cards, and allow you to set up direct debits.
The good thing about these accounts is there are no bank charges for paying late, but there are also no overdrafts. You are also likely to pay a small amount for them.
You can switch your current account to a credit union but it will take more than seven days.
And what if I want to know more?
Think a credit union might be for you? The website findyourcreditunion.co.uk allows you to find unions, which you might be able to join, and then you can contact individual unions to find out what they offer.
A short history of credit unions
According to the British Credit Union Historical Society (BCUHS), credit unions in the UK were first started in Scotland by Irish immigrants and by West Indian immigrants in England in the 1960s.
These alternatives to money lenders and other unofficial lending bodies were already popular in Germany and elsewhere, and became more popular in the UK after the Credit Unions Act was passed in 1980.
The first recorded British credit union was the Hornsey Co-operative, established in 1964 in North London by Caribbean families. It is the foundation of what is now London Capital Credit Union.
ABCUL (Association of British Credit Unions Limited) says that there are now 277 credit unions across England, Scotland and Wales employing more than 1,700 staff.
These unions are used by 1.4m people, with total deposits of £1.54 billion and total loans of £1.1billion.
The Bank of England says that membership grew nearly 3% in the year to March 2020 (latest figures).