Credit unions are relatively unknown within the UK but they play an essential part in the banking industry as a whole. In the United States, Ireland and Germany, as well as the Caribbean credit unions make up a large part of the banking industry and offer services that closely resemble retail banks.

This blog post will therefore concentrate on the role credit unions play within the United Kingdom and why they can be a great addition to your personal finance tools.

What Are  Credit Unions?

Credit unions are financial cooperatives which means that they do not have typical shareholders. The members (i.e. customers) are the owners of credit unions and can vote for how the credit union can be ran as well as how much dividend they receive. The dividend part is another aspect of what differentiates credit unions from retail banks, in which credit unions provides its members dividends as opposed to interest on the savings.

Key Feature – The Common Bond

The biggest difference between credit unions and banks as well as building societies, is by law (under UK law) credit unions must have a common bond. A common bond is a geographical location or industry that the credit union only serves – with a maximum of 3 million people. The benefit of this is that credit unions therefore provide a truly local or specialist service.

For example, Crownsavers Credit Union services those who are working within the South East of London (with a SE postcode). Likewise there are credit unions for the NHS, Police as well as church groups. 

Credit Unions Accounts

Most credit unions have a default Share account. This is the savings account that your share (i.e. ownership) is attached to. It is the account that you will receive a dividend on savings should the credit union make enough profit and it is voted on at the Annual General Meeting.

Along with the loans credit unions offer its members loans. By law credit unions are not allowed to offer loans priced at more than 42.6% APR. The loans are therefore significantly cheaper than the average payday loans company (around 1100% APR). Credit unions tend to also take in the whole picture of their members, allowing those who are typically excluded to finance to be able to get access to affordable loans.

How Credit Unions Can Make You Money Smart?

You can be money smart by opening a credit union account. The benefit of opening a credit union account are:

• You are a part owner of the organisation therefore have a say in its governance and operations.
• The default account is a savings account – credit unions encourage you to save.
• Most credit unions have Save As You Borrow schemes.
• Most credit unions have local or industry related partnerships – allowing you to save or repay your loan directly from your salary.
• Credit unions are typically small enough to know their members, lowering the risk to lend to the member (therefore allowing smaller interest rates).
• Dividend payments can be larger than the average interest on current accounts (though unlike interest rates, dividends are based on profit generated meaning some times no dividend can be paid).
• Your savings help other members (by it being offered as loans). This in turn helps the wellbeing of your fellow members.

How Can I Find My Local Credit Union?

You can search on the Find Your Credit Union website. This will allow you to search for local or industry related credit unions near you.

MoneySmrt Tip

Get to know your credit union – whether it is industry based or it is in your local community. Even if you are great with your finances, never need credit and are happy with your existing accounts, savings and borrowing small amounts from your credit union helps your overall community (it can also help with your credit score).

I will be posting more about credit unions and giving some useful tips on how to get the best out of them.