Credit Unions
Credit unions are member-run savings and loans suppliers. Customers are often on low incomes or have bad credit scores. Almost 1.5m people in the UK are members of a credit union.
Table Of Contents
What is a Credit Union?
A credit union is a not-for-profit finance firm. Each is owned and run by its members. Unlike banks, there are no shareholders or profit targets.
Credit unions are used by people with a ‘common bond’. This might be living in the same area, having the same job or belonging to a trade union.
Credit unions are financial cooperatives that:
- Promote financial inclusion
- Provide ethical banking
- Are sometimes known as community banks.
Definition and purpose
The official definition of a credit union is “a financial co-operative that's owned and controlled by its members.”
The purpose of a credit union is to provide savings and loans to people on low incomes. If a bank turns you down, a credit union might accept you.
Differences from banks
Credit Unions |
Banks |
|---|---|
Run by a volunteer board of customers, who are called members. |
Either privately owned or publicly traded, trying to make a profit. |
Members are the customers of the credit union. |
Bank customers do not have any vote or say in the running of the bank. |
Credit Board members are unpaid volunteers. |
Bank board members are often highly paid. |
How credit unions work
Credit unions work by members saving money. This pool of cash is then used to lend to other members.
Historically, members of a credit union needed savings with the union before they could borrow. Many credit unions are more flexible these days.
If the credit union makes a profit, it uses that money to help its members. It might pay a dividend on savings balances. Find Your Credit Union says this can be as high as 3%.
Membership and eligibility
Being eligible for membership with a credit union depends on the ‘common bond’. This might be:
- living in the same area
- working in the same job
- being in a trade union
- going to the same church
Each credit union has its own eligibility criteria. For example, the London Mutual credit union is open to:
- People living or working in Southwark, Lambeth, Westminster or Camden
- People working in an education or health occupation in Greater London
- Members of HM Armed Forces (anywhere in the UK)
- People working for Transport for London (TfL)
Ownership and governance
Each member (customer) of a credit union becomes a shareholder in that credit union. They can vote at the annual general meeting.
Any member can also stand for election to the board. This board of volunteers governs the credit union, sets its rules and plans its future.
Member benefits and services
The main member benefits and services are savings accounts and loans.
Other products may include:
- Cash ISAs
- Junior savings accounts
- Christmas savings accounts
- Prepaid debit cards
- Insurance
- Mortgages
Advantages of Using a Credit Union
Better interest rates
Credit unions may offer lower interest rates on loans than other lenders. There’s a cap on the amount credit unions can charge:
- In England, Scotland and Wales, the cap is 3% a month or 42.6% APR Representative.
- In Northern Ireland the cap is 1% a month, or 12.68% APR Representative.
These interest rates are cheaper than those typically offered to people on low incomes or with poor credit scores.
The following table gives examples of other types of lending:
Type of loan |
%APR Representative |
|---|---|
Payday loan (£500) |
91% |
Short term loan |
611% |
Bad credit loan |
1333% |
Pawnbroking |
165.5% |
Lower fees
There are no hidden charges with credit union loans. This means you can pay off the loan early penalty-free.
Financial education and responsibility
Credit unions offer financial education to help members to manage their money.
Many credit unions work with schools, employers, and community groups to show how to save money and borrow responsibly.
Personalised customer service
Many credit unions are known for their customer service. They often get high customer ratings.
Choosing the right credit union
The right credit union for you will depend on fitting in with the ‘common bond’ that’s needed to join.
You might be eligible on grounds of where you live, your job or the church you go to.
Researching local credit unions
Findyourcreditunion.co.uk has a handy tool to help you find credit unions near you.
Enter your details in the search boxes as requested and click “Search”. The tool will then present nearby credit unions that you are eligible to join. It will show you:
- the common bond
- the credit union address
- website link
- products offered
- whether it is a member of the Association of British Credit Unions Ltd (ABCUL)
Membership application process
To join a credit union, you’ll need to complete a membership form. You can do this online or on paper.
You’ll also need to show two forms of ID such as a passport or utility bill.
Opening an account
When you join a credit union, you’ll normally open a “share account”. This reflects the share you now own in the credit union.
A share account might operate like:
- a current account – you can have your wages paid into it and spend using a debit or.
- a savings account where your money earns interest.
Services and products offered by credit unions
Savings accounts
All credit unions offer savings accounts. Some savings accounts have a fixed rate of interest, but most offer an annual pay-out or ‘dividend’.
The total dividend you receive varies. It depends on how much profit your credit union has made in the past year.
Current accounts
Credit union current accounts allow you to have your wages paid into your credit union account and use a debit card to spend money or withdraw cash from ATMs.
There might be a fee for some transactions - you’ll be told about these upfront.
Credit cards
Credit unions don’t usually offer credit cards. But most offer a prepaid card where you preload money onto a card then spend it.
Loans and mortgages
Credit unions are often willing and able to make small loans of £50 to £3,000 at affordable interest rates.
The maximum any credit union will ever charge for a smaller loan is 3% per month on the reducing balance, which works out as 42.6%APR Representative. Many charge a lot less than this. For people with a poor credit score, this is usually cheaper than commercial lenders available to them.
Credit unions can often transfer the cash to your account quickly – such as the same day.
Some credit unions also offer mortgages. These work in the same way as a mortgage from a bank or building society.
Understanding credit union fees
Most credit unions charge a one-off non-refundable membership fee. This is usually about £5. This covers the costs of setting up your account and doing the checks required by Anti Money Laundering Regulations.
Some credit union current/checking accounts have fees for ATM withdrawals and balance enquiries.
Current account fees
Some credit unions offer a choice of current accounts with different fee structures, so you need to work out which one works for you.
For example, London Mutual Credit Union offers four different current accounts with fees as follows:
Monthly fee |
ATM withdrawals |
|---|---|
Free |
No ATM access |
£5.05 |
ATM withdrawals 88p each |
£6.50 |
Four ATM withdrawals a month included |
£11.40 |
Unlimited ATM withdrawals included |
Some credit unions offer overdrafts on current accounts. You’ll be charged interest on any money borrowed this way, but only for the time where you are overdrawn.
Loan fees
Credit union loans don’t usually come with extra fees. You will only pay interest on the money you borrow. When you take out a loan, the credit union will tell you:
- The interest rate
- How much you need to repay each month
- For how long you need to make repayments.
Credit unions don’t usually charge fees for repaying a loan early.
Tips to minimise credit union fees
- Take ATM withdrawal fees into account when taking cash from your current account. One large cash withdrawal per week or month might be cheaper than many small ones.
- Try to minimise use of your overdraft on your current account.
- Set up a direct debit from your current account to make loan repayments. This will ensure payments are always made on time.
- The quicker you repay a loan, the less interest you will pay.
FAQs about credit unions
Can anybody join a credit union?
Anybody can join a credit union if they fit the “common bond”. This might be where you live, your job, your union or your church.
Is your money safe in a credit union?
Credit Unions are regulated. They are part of the Financial Services Compensation Scheme (FSCS). This protects deposits up to £85,000.
How easy is it to withdraw money?
It is usually easy to withdraw money from your credit union savings account. You can do this:
- Online (by transferring it to another account)
- By visiting the credit union in person
- Using a card at an ATM.
Are credit unions safer than banks?
Credit unions are just as safe as banks. The Financial Services Compensation Scheme (FSCS) protects savings up to £85,000 per person per credit union.
How are credit unions regulated?
Credit unions are regulated by the Prudential Regulation Authority and the Financial Conduct Authority.
Are Credit Union Deposits Insured?
Credit union deposits are not insured. The Financial Services Compensation Scheme (FSCS) protects savings up to £85,000 per person per credit union
What happens if I move or change jobs?
You can remain a member of most credit unions if you move home or change jobs.
Summary – credit unions
Credit unions are financial cooperatives run by members for members. They usually offer small affordable loans to people who would pay more to borrow from banks and other lenders.