What is a Credit Union? Should I Join One?

Credit unions are co-operatives that provide loans and savings accounts to members. Find out how they work and how you can join one.

Ruth Jackson-Kirby, Rhiannon Philps Last updated on 13 January 2023.
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What is a Credit Union? Should I Join One?

Credit unions are not-for-profit co-operatives owned by their members. This means they are not focused on providing profits or dividends to external investors. Instead, the aim of a credit union is to provide the best possible service to its members.

There are currently just under two million members of around 400 credit unions across the UK, with membership steadily increasing. They can provide a range of financial products, including current accounts, savings accounts and loans.

Credit union coverage remains fairly small in the UK, but in many other countries they are far more popular.

How do credit unions work?

Credit unions are run by their members and aim to work for their benefit. The savings you deposit in a credit union are used to fund loans to the members that need them.

Members of a credit union could receive a share of any profits, and have the power to elect directors. There are no external stakeholders in a credit union; any money that a credit union makes goes back into the organisation or is shared among its members.

To join a credit union, you typically need to meet a ‘common bond’ requirement. This could be living or working in the same area or being a member of the same organisation, for example.

Credit unions vs banks

The main difference between banks and credit unions is that banks are run for profit, while credit unions are not-for-profit. Also, credit union membership is based around a common bond (such as location or employment), whereas banks don’t typically have these requirements.

Furthermore, banks generally offer a wider range of services compared to credit unions. They often offer mortgages, overdrafts, credit cards, and more, in addition to the current accounts, savings accounts and loans most commonly offered by credit unions.

Despite these differences, credit unions are regulated by the Prudential Regulatory Authority and the Financial Conduct Authority, which is similar to a standard bank.

And, just like banks, any savings up to £85,000 that you hold in a credit union are protected by the Financial Services Compensation Scheme (FSCS), which means if the credit union fails you would get your money back.

What services do credit unions offer?

Credit unions offer various services to their members, notably loans and savings accounts.

But many can offer a whole lot more, including children’s savings accounts, prepaid cards and debit cards, current accounts and ISAs – a handful even offer mortgages.

Savings accounts

Credit unions offer a variety of savings options. The type of account you can open will depend on what your credit union offers. Most offer simple easy access savings accounts, but there may be alternatives that are fixed, such as Christmas savings accounts, for example, that you can only withdraw from during the festive period.

You may earn interest on savings, as you would with a conventional savings account, but you are more likely to receive an annual dividend, which is a share of the credit union’s profits. The size of the payout will depend on how well the credit union has performed. The more you save, the greater the share of the dividend you are likely to receive.

On top of offering interest or a dividend, many credit unions include free life insurance with their savings accounts. This means that if you die your savings could be increased by an insurance payout and then passed on to your nominated beneficiaries – though there may be restrictions depending on your age and health. Free life insurance packages from credit unions are likely to be small in comparison to your full financial protection needs, so you shouldn’t automatically assume this will be all the life cover you require.

» MORE: Do I need life insurance?

Loans

If you are a member of a credit union, you can apply to borrow money from it. Because credit unions exist to help their members, you might find more favourable rates as there is a cap on how much interest they can charge.

The limit is currently 3% a month, or 42.6% APR (annual percentage rate), in all of the UK except for Northern Ireland where the cap is 1% a month (12.68% APR).

Before you can apply for a loan from a credit union, some will require you to have saved with them for a set period of time. This isn’t the case with all unions though, with some accepting loan applications from new members.

Additionally, many credit unions will require you to build up your savings alongside your loan repayments.

You can usually borrow smaller, unsecured loans from a credit union. The amount you can borrow may depend on how long you have been a member and how much you have in your savings account.

An added benefit of a credit union loan is they often come with free life insurance to cover the debt. This means if you die before you finish repaying your loan, the life insurance will clear what you owe.

» MORE: Credit union loans explained

Current accounts

Some credit unions allow members to open a basic current account with them. This can be particularly helpful if you have struggled to open an account with a traditional bank or building society.

With these current accounts, you can typically deposit and withdraw money, as well as having your salary, pension or benefits paid in. Some accounts will offer prepaid cards or debit cards, which you can use to spend in shops and online.

Depending on the credit union, you may be able to receive help with budgeting and managing your money.

The features offered by a credit union current account may be more limited than accounts from other providers. You may not be able to get an overdraft, for example.

Pros and cons of credit unions

Joining a credit union has its benefits, but there are some potential downsides to bear in mind too.

Benefits of credit unions

Some reasons you may want to become a member of a credit union include:

  • They are not-for-profit and work for the benefit of their members.
  • People who have struggled to open an account at a traditional bank, or qualify for a loan, may find it easier with a credit union.
  • The interest rate on loans is capped, so they could be a more affordable borrowing option than other lenders.
  • You often get free life insurance protection on loans and savings accounts.
  • Some credit unions may offer advice and tools to help you budget and manage your money.

Disadvantages of credit unions

However, credit unions can have some downsides:

  • You may be able to get a better return on your money if you save your money elsewhere.
  • Credit unions won’t necessarily offer the best interest rates on loans, so you may find a cheaper deal somewhere else.
  • They currently only offer a limited range of services, so you’ll have to go elsewhere if you want a credit card or a more specialist form of finance.
  • Some credit unions may charge a small joining or administration fee.
  • Credit unions have eligibility criteria, so you will be limited in which ones you can join.

How to join a credit union

Most people are likely to be eligible to join at least one credit union. Credit unions will typically require their members to have a common bond that links them, such as:

  • living in the same area
  • working for the same employer
  • belonging to the same trade union, church or associationYour employer, trade union or any group that you are a member of may be able to tell you if they are associated with a credit union. Otherwise the easiest way to find one is to search online.

Image source: Getty Images

About the authors:

Ruth is a freelance journalist with 15 years of experience writing for national newspapers, magazines and websites. Specialising in savings, investments, pensions and property. Read more

Rhiannon is a financial writer for NerdWallet, with a particular interest in personal finance and insurance guides for consumers. Read more

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