Your money-making expert. Financial journalist, TV and radio personality.
Introduction to Credit Unions. Written by Sheenagh Young, CEO, South Manchester Credit Union.
Around two million people in the UK are members of credit unions. Not exactly niche, but much less common than in the States where around 60% are members of these not for profit, member-owned organisations. Credit unions are for everyone, they’re a great way to save and to have access to affordable loans if the need arises. Best of all, there are no shareholders reaping profits, so all profits are circulated back to members through dividends or through keeping loan interest rates as low as possible.
Credit unions have been around for decades and are growing to help more people through the cost-of-living crisis. It’s the reason I’m shouting about credit unions to Money Magpie readers!
Yes, practically everyone can join a credit union. I run South Manchester Credit Union which serves people in the South Manchester area. Many credit unions have geographical membership criteria (or a ‘common bond’ as we call it), whilst others serve people working in certain jobs and industries.
They’re all fully regulated. And have the interests of their members at heart.
You can check your options at www.findyourcreditunion.co.uk. Even if you’re unlucky enough not to have a community credit union that suits you many credit unions are online only and have broad membership criteria. If you have a Co-op Card from shopping at your local Co-op store that will qualify you to join The Co-Op Credit Union whilst MyCommunityBank will consider your membership of the National Trust as qualifying.
Credit unions provide financial services that mirror traditional mainstream financial services – like your big high street banks – from savings accounts, loans and in many cases, current accounts too. Even Camilla, the Queen Consort of the United Kingdom is a member of a credit union. The Royal family are admittedly not our typical customer!
But as much as we would lay out the red carpet for Camilla, we also welcome and stick with all our members for the long haul. I often see someone coming to us when finances are tight and they’re needing support to manage with day-to-day expenses and get a kick, years later, when they’ve built a savings pot and they’re coming to the credit union seeking a loan for a special holiday or a new car. You don’t often get this sort of loyalty and long-term relationship with other financial providers.
If you want to become a member, you can join easily online, which is also where you can check the approval criteria to ensure you’re eligible to join and find out more about credit unions. There is usually no fee to join – it’s free.
It’s also important to note that different credit unions provide different services, so it’s good to check that the credit union you apply to can provide you with what you need.
Traditionally, credit unions have been more focused on providing savings and loan services, but over time there has been a significant increase in the range of products available. Their accounts are flexible, and enable people to save what they can, when they can.
Credit unions are here for everyone and are currently growing with people whose finances are newly strained by the ongoing Cost of Living crisis. Credit unions may be able to also support people who struggle to access traditional financial services due to having a poor or limited credit history. They offer products and services to people at much better rates than high cost lenders, and have a responsible approach when they do, making sure that the individual can repay the money they borrowed without getting into financial trouble. They will often be able to point you in the direction of other financial support too.
When saving with a credit union, most give out a yearly pay-out in the form of a ‘dividend’. It’s the way that credit unions share their profits with their members and the amount depends on how the business has performed over the year. The more you save, the larger your share of the yearly dividend pay-out will normally be. Lots of members value the fact that people save together and from those pooled savings are able to lend to each other all year round.
Like all regulated banks and building societies in the UK, credit unions are fully supervised and regulated by Prudential Regulatory Authority and the Financial Conduct Authority. Savings are protected by the Financial Services Compensation Scheme.
Loans can start from as little as £50 and are administered so that borrowers save at the same time as repaying the loan. This means you start to build your own savings pot whilst borrowing.
Credit unions will check if a loan is right for you because they want to make sure you can afford repayments without putting you under financial strain. Interestingly, in England, Scotland and Wales,
there’s a cap on the amount of interest that credit unions can charge on their loans, set at 3% a month or 42.6% a year APR.
They will be as open-minded, fair and transparent as they can be and may be able to help even if you have been turned down by other mainstream providers. One of the other benefits is that their teams will help you if you run into trouble with repayments and will be as flexible as possible to help you get back on track.
If you find yourself in debt from multiple providers, you may be able to take out a ‘consolidation loan’ from a credit union, by restructuring your existing debts into a single, more affordable loan.
Some credit unions also offer ‘green loans’ for people to make their homes more energy efficient, for example, fitting new windows or doors or getting a new boiler installed. Green loans can also help with other environmental purchases including electric bikes and scooters, electric cars and the installation of car charging points. Good for your finances and good for the planet.
If a credit union is unable to offer you a loan, they may suggest you apply to a social lender that is a member of Responsible Finance. These lenders are specialists in helping people with poor or thin credit histories who can nonetheless afford to make repayments. They include the likes of Scotcash, Moneyline, Fair for You and Fair Finance. They’re all non-for-profit or with a strict social purpose, meaning they’ll reinvest surpluses to keep interest rates and repayments as low and as flexible as possible for their customers.
– They are non-for-profit and so work to benefit their members.
– Interest rates on loans are capped in England, Scotland and Wales so they are often the more affordable borrowing option in comparison to other lenders.
– Many offer free insurance comes with loans and savings accounts from Credit Unions.
– Credit unions are likely to be able to provide tailored advice and specific tools to help you manage a budget and your money.
– Their simplicity and social purpose are big positives.
– Many have branches with friendly staff and volunteers.
– They don’t offer as wide of an array of products and services as banks do.
– Members of credit unions have something in common, such as the same employer, trade union, place of worship or living in the same area. So, you may be limited in which ones you can join.
– Some credit unions do charge a small joining or administration fee.
Employers can form partnerships with credit unions. The partnerships enable staff to become members and access their services. Through these partnerships, employers can set-up a process whereby an employee’s chosen sum of money is directed from their salary to their credit union savings account every month. Just like how pensions work. They also permit people to borrow and make repayments from their salary.
Referred to as ‘payroll schemes’, people can save from £15 up to £1,500 per month, and it’s not all about how much you save, it’s that you do save, and regularly.
Lack of a financial buffer has been shown to compound mental health issues, reduce quality of life, and negatively impact personal relationships and productivity in the workplace. With payroll schemes, the power is in the hands of the people, empowering them to improve their money management and see an improvement in quality of life and confidence levels. You can suggest that your payroll or HR department sets up a credit union payroll partnership to help you and your colleagues – it’s incredibly easy for them to do.
In a survey of 1,600 Leeds City Council and NHS York workers using a Leeds Credit Union payroll scheme, 96% recommended a payroll savings scheme to their co-workers and 79% found the simplicity of saving in this way to be the biggest draw.
These schemes work with what is known as the ‘set and forget’ method. This means that people can choose a regular amount to save, which is paid into their credit union account direct from their wages. Before they know it, they’ve built up savings to help with their personal goals, or a handy fund to help them cope with a ‘rainy day’. Research has shown that saving in this way helps people form good savings habits while simultaneously increasing financial resilience, protecting them from financial shocks, like unexpected health issues or home repairs.