Saving with a Credit Union
Credit unions offer an alternative to borrowing from, or saving with national banks. Credit unions are owned and democratically controlled by it's members and offer a range of financial services including loans and savings accounts. Many Credit unions are willing to offer loans to members even when they have been turned down by banks.
A credit union is a community savings and loans provider but isn't just an oasis for those struggling to qualify for high street borrowing. As community co-operatives, they can also appeal to those who want to benefit their neighbours. And while savings rates are so low, they can sometimes beat high street rates.
This guide tells you how to find a credit union near you, how safe they are and when to use one. By starting to make small savings now with your local credit union, you can prepare yourself for the guaranteed swap over to Universal Credit. We will all be made to migrate across approx 2019, so if we were able to save say £10 a month between now and then we would have approx £200 saved to tide us over when the swap happens, obviously the more you can save the more you will have available.. By saving with them it also means when the time comes you can apply for loans with them at reasonable interest rates..
Credit unions aim to help you take control of your money by encouraging you to save what you can, and borrow only what you can afford to repay. In essence, they're savings and loan co-operatives, where the members pool their savings to lend to one another and help to run the credit union.
This is done in a ‘not-for-profit’ way, so the cash is only used to run the services and reward the members, and NOT to pay outside shareholders, like most other financial institutions
How do credit unions safeguard your money?
Throughout the year, those running credit unions must put aside enough money to ensure they don’t go bust. Any money that’s left over is channelled back to those who’ve got a savings account (to pay them interest) or it’s used to try to improve the overall service.
To keep all the money safe, credit unions can’t lend out all their members’ savings or plough the remainder into anything that carries too much risk. All money in savings with credit unions has the same FSCS Government protection as bank savings accounts.
Borrowing from a credit union
A key appeal of credit unions is a willingness to make small loans of £50 to £3,000, which most high-street banks won’t do. They're a much cheaper alternative to payday loans, and some credit unions can even get cash to you the same day.
In the old days, a credit union kept a strict rule that it would only lend to those who already had savings but this is changing; some will now lend to those who are new to the organisation.
They tend to be ultra-flexible, allowing you to save large or small amounts weekly, monthly or whenever you can.
Bigger credit unions may have online banking meaning you can pay in online, and have branches and collection points such as local post offices; some smaller unions will have just a couple of opening hours a week and likely be based in a community centre or church hall.
Credit union savings usually offer a dividend rate rather than an interest rate. This means that it depends how well the credit union does that year - so you don't know what you'll get until the end of the year. Typically, dividend rates are 1-3%, but it could be as low as 0% or as high as 8% of the sum saved. Dividends are paid before tax, so it's up to you to declare tax on any earnings, although your credit union should be able to help you with the paperwork.
Do dividend payments ever pay more than high-street banks?
Some credit unions, usually the larger ones with thousands of members, now offer accounts with advertised interest rates, like bank savings accounts. You can identify these as they'll have a rate, and it'll say "AER" (Annual Equivalent Rate) after it. Most credit union savings accounts aren't table-topping, but there are some decent rates out there if you search.
What fixed savings accounts are available?
Some credit unions now offer cash ISAs as part of their savings range. A cash ISA is a savings account you don't pay tax on, but there's a limit to how much you can save each year (currently £20,000). For more information on ISAs, read the Cash ISA guide.
Credit unions are small organisations and lack the enormous resources of the big banks. On the other hand, regulations mean they must be far more prudent and not over-lend.
As with any type of savings, the most important thing to consider is “in the event the credit union went bust, is my cash protected?”. The answer is yes. Credit union savings have exactly the same protection as normal savings accounts; in other words, the Financial Services Compensation Scheme will pay back £85,000 per person, per institution. In any case, many credit unions limit the total you can save with them to £10,000 or £15,000.
If your union provides a bank account facility, it operates very much like a Basic Bank Account.
Most credit unions will charge you for the account - this is to cover costs, as they are not-for-profit entities. The charge should be no more than £1.50 a week.
The charge also means you don't pay fees for paying late or making an error. Otherwise, credit union bank accounts generally operate like any other bank account. You can have your salary paid in, set up direct debits and standing orders from the accounts, take money out at cash machines, and some will issue debit cards so you can use them in shops. However, you won't get an overdraft or a cheque book, so if this is what you need, you're better off looking on the high street.
The other thing you won't get from a credit union bank account is the seven-day switching guarantee that high street banks offer. This is a voluntary standard and credit unions aren't signed up to it. You can still switch your bank account to a credit union - it's just likely to take up to a month to complete the switch. It's easy to find if you're eligible to join one.
There are a number ways to find a credit union near you and check out precisely what your local credit union offers: The Association of British Credit Unions Limited (ABCUL) has a Find Your Credit Union website, which does exactly what it says on the tin.
You can search by postcode, employment type, or other organisations that you think may have a union. If you'd prefer, you can call ABCUL on 0800 015 3060.