Credit unions have been present in Britain for over fifty years, but they have become more popular since the crash of 2008 put off many people from using banks.
A credit union allows a group of people to invest their savings and to take out loans. They are co-operatives, meaning that each member has one vote in the union’s decisions.
There are over 49,000 credit unions worldwide, including about 580 in the UK, although only about 1.5% of the UK population belong to one. They are more mainstream in the Americas, particularly the Caribbean. Credit unions in their modern form were brought to Britain by Caribbean migrants in the 1940s and 50s. In the Republic of Ireland, the majority of the population belong to a credit union.
How do they work?
- Members of credit unions generally share a “common bond”. This is usually the fact that they live in the same area. For example, Lewisham Plus is a credit union for people in the Lewisham area of south London. Alternatively, a credit union may serve a workplace, faith group or trade union. One of the UK’s largest credit unions is Copperpot, whose members are police officers. This common bond means that when you join a credit union, you are investing in a community and keeping money local.
- Unlike building societies, credit unions lend money only to their own members – those who have put money into them.
- All members of a credit union have one vote, giving them equal say over big decisions. This differs sharply from banks, of course. Credit union staff are usually subject to an elected voluntary board.
- Credit unions connect savers and borrowers directly. Connecting these two groups is theoretically the purpose of banks but in practice other things get in the way. Unlike banks, credit unions cannot lend out more money than has been deposited with them.
- Once you have joined a credit union, you will start gaining interest on the money you have put in. Different credit unions have different rules about what sort of loan you may take out; this may be affected by how long you have been a member, how much money you have already put in, and so on. It is often easier to take out a loan from a credit union than from a bank, particularly for the financially excluded who are otherwise prey to doorstep lenders and payday loans companies. Credit unions commonly deal in smaller loans than banks and tend to have lower rates of interest.
- Most credit unions do not provide current accounts, which can make it hard to use them as an alternative to banks entirely. However, a few of the larger ones do provide current accounts, along with visa debit cards. There is usually a small monthly charge to use these accounts, although the credit unions insist that this is more transparent and honest than the overdraft fees and other charges levied by many banks.