What are credit unions? - Savings - Guides - Moneyfacts

Guides

What are credit unions?

What are credit unions?

Category: Savings

Updated: 15/03/2016
First Published: 13/08/2013

Credit unions, although not widely publicised, are a fast-growing alternative to banks, building societies and doorstep/payday lenders.

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

What is a credit union?

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 £75,000 that each individual has with a credit union.

What services do credit unions offer?

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 directly in.

Savings accounts

  • Ethical savings accounts where 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 in-built 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 have saved 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 in-built so that if you die, the loan is fully repaid.

What next?

Find credit unions that you are eligible to join
Compare the best available savings account for your needs
Find the best bank account for you
Compare loan repayments and interest with our easy-to-use loan calculator
More savings guides

Disclaimer: This information is intended solely to provide guidance and is not financial advice. Moneyfacts will not be liable for any loss arising from your use or reliance on this information. If you are in any doubt, Moneyfacts recommends you obtain independent financial advice.

Related Articles

How to find lost premium bonds

Premium bonds are a savings vehicle provided by National Savings and Investments (NS&I). They don’t earn interest like other savings accounts but are instead entered into a monthly prize draw.

Sharia’a compliant savings accounts

Islamic savings accounts offer a Sharia’a-compliant way of saving for Muslims living in the UK, as well as an ethical alternative for people of all faiths.

How to save whilst studying

Squirreling money away in a savings account may not be high on your list of priorities when studying at college or university.
 
 
Close