Consumers often overlook credit unions as a way of saving money. This is probably down to a number of factors: Credit unions don’t tend to market themselves heavily, so there are many common misconceptions about them, and some find the whole idea confusing.
In this article we’ll be going over everything you need to know about credit unions. We’ll also be answering some key questions, so you know what to expect, should you choose to join one.
What's Included?
What is a credit union?
In a nutshell: Credit unions are financial cooperatives. This means their members own and run them, and they offer credit to members at reasonable rates.
When you save with a high-street bank, you’re asking the bank to hold on to a set amount of funds. The bank makes a note in an electronic ledger of the amount you have saved with them.
Banks use money held in your accounts for other purposes. This can include various forms of credit, such as loans and overdrafts. Borrowers pay back the money they borrow, plus interest, which helps the bank to turn a profit, improving the value of the bank and allowing the bank to do more business.
Generally speaking, the bank will offer the account holder some reward for not touching their savings, such as paying a percentage of interest to you. This could be anything from 0.01% to 1.5% Annual Equivalent Rate (AER), depending on the savings product.
Saving with a credit union works in a similar way to a high-street bank, but there are several crucial differences.
First, high-street banks are run for profit. This means that the money intends to use all the money you keep in bank accounts to make money for the bank.
Credit unions, on the other hand, are not publicly-traded companies. Credit unions use the money you save with them as a credit fund for members. However, as a cooperative, the credit union will always use profits made for the benefit of the members, rather than expansion.
Building society vs credit union
You may be asking, isn’t a credit union just the same thing as a building society?
Not exactly. Many building societies do have similar structures and governance to credit unions – holding Annual General Meetings (AGMs) where members ballot to decide the organisation’s future, for example – but they also differ in many ways.
A big difference between the two is that credit unions are not publicly traded. While building societies are not run for profit, they are often publicly traded.
The biggest difference by far between banks, building societies and credit unions is the notion of the “common bond”.
What is a common bond?
Under the Credit Unions Act 1979, members of all credit unions in the United Kingdom must be united by a “common bond”. This means that all members must have something in common that ensures the organisation remains membership-focused. This is also to prevent them growing so large that they outcompete other financial institutions.
The common bond can be the postcode or area you live in, the industry in which you work, or membership with another organisation, such as a trade union.
Building societies and banks do not require a common bond to be legitimate. Credit unions do.
Why save with a credit union?
Credit unions are not publicly traded companies, but member-owned cooperatives. All the money the credit union makes goes back to its members. Additionally, credit unions are usually small organisations with selective memberships, which means that there’s less need to focus on the business side of things. Instead, credit unions place more focus on delivering services to members.
As a result, credit unions, depending on performance in a financial year, can quite frequently offer better or more stable AERs on savings than many high-street savings accounts. After the AGM each year, the attendees vote to pay all members a certain percentage as a dividend, usually based on the average stake you’ve held with the organisation during a set period.
Saving with a credit union can be better, long-term, than saving by more usual methods. However, remember that everyone’s financial situation is different, so it’s best to weigh up what’s best for you.
How to save with a credit union
Firstly, find a credit union online, either by using a search engine or by using a specialised search tool, such as Find Your Credit Union. If you are a member of a trade union or a particular industry, you may already have had recommendations, but it’s worth comparing.
Make sure to check the credentials of any credit union before you apply. Check that the Financial Services Compensation Scheme (FSCS) has them on their register, and the Financial Conduct Authority (FCA) has authorised them.
Being small organisations by nature, credit unions usually ask their members to contribute a minimum amount of money every month to keep their account open. Usually, this is no more than £20, but it can vary from place to place.
This is a stumbling block for some people, since it might feel like a subscription. However, it’s really no different than putting money away from your wages every month. Plus, unlike Netflix, that money isn’t gone, just held at arm’s length until you ask for it back.
Once you’ve found a credit union, joining up is usually as simple as filling out an online form. Often you’ll have to assign a beneficiary, who will be able to disburse your savings should you die.
Your credit union account will remain open as long as you keep saving, and will close if you empty out all the money you’ve put away.
Do credit unions check credit score?
A worry some people have about credit unions is that they perform credit checks when you sign up for a membership. This isn’t the case. Credit unions do not check your credit score before approving your membership. Credit unions do offer credit products to members. Just saving with a credit union does not usually require any kind of credit search.
If you apply for credit during your time as a member, however, the credit union will likely perform a hard search. Unlike many high-street lenders, credit unions are often happy to lend to people with bad credit.
Just bear in mind that if you default on a credit union loan, it will still negatively affect your credit score, so use the same common sense you would when applying for any loan.
Can I transfer money into my credit union account?
Not only can you transfer money into your credit union account, the credit union actively encourages this. Most credit union members set up a regular payment or Direct Debit with their bank to keep the account open.
You can also put away money as a single payment on top of your regular payment. The credit union will tell you how to pay into your account, so you can ensure your money ends up in the right place.
Can I take my savings out of my credit union account?
Yes, you can take your savings out of your credit union account, but different credit unions have different policies. Some credit unions offer instant-access savings, meaning you can request a withdrawal of any sum and have it paid back to you at any point. Others require some advance notice. They may also place limits on access, usually in return for better rates.
Just bear in mind that you need to keep paying in to the credit union account to keep it open. If you take all the money out of a credit union account it will automatically be closed, meaning you’ll have to apply for another to start saving again.
Are credit unions the same as trade unions?
No, credit unions are different to trade unions.
Trade unions help workers collectively bargain for better treatment at work. Credit unions are mutual cooperatives that provide their members with financial services.
Many trade unions, such as Unite and UNISON, have their own internal credit unions. Additionally, some credit unions offer memberships to certain trade union members as part of their common bond.
However, the two entities are distinct. You don’t have to join a trade union to join a credit union. There are many credit unions that do not require trade union membership as part of their common bond.
Most credit unions do not require you to participate in anything as part of your membership. Attendance at AGMs is totally optional. However, attendance does let you have a say in the running of the organisation, so it may be worth attending!
Are credit union savings taxable?
Yes, HMRC counts any income you make from your dividend as taxable income. If this is likely to be a concern, consult an accredited accountant.
To recap
- Credit unions are mutually-owned financial cooperatives that lend money to their members at reasonable rates.
- They raise most of their funds through savings accounts that offer generous annual dividends to members.
- Credit unions differ from building societies in that they require a “common bond” to be legitimate. They are also not publicly-traded companies.
- They don’t check your credit score when approving you for a membership. However, you must be able to commit to actively saving with them.
- You can pay into a credit union savings account at any time, and you may also withdraw funds, but be sure to check withdrawal policies.
- Credit unions are not the same as trade unions and you do not have to be a trade union member to join one.
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