What does a credit union do?

What is a credit union?

A credit union is a financial organisation that provides credit and savings products. They have lots in common with high-street banks - they provide similar products and services and are also regulated by the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA). But there are two main differences which set them apart.

First, everyone who wants to open an account with a credit union needs to become a member. Membership criteria varies between credit unions - sometimes you need to be living in a specific area or working in a certain field. The credit unions we work with have a very broad criteria for membership and accept applications from almost all professions, as well as members of certain organisations. 

Secondly, credit unions are not-for-profit organisations. This means any profits made are returned to members in the form of competitive interest rates on savings and loans, or used to improve their services and reach more people. This means you may be able to find a more attractive savings rate with a credit union than a high-street bank and could be more likely to be accepted for a loan with them.

How does a credit union work?

Credit unions work in a similar way to high street banks who offer loans and savings products. The money deposited into these savings accounts is used to provide personal loans to other members. In line with regulatory guidance, credit unions don’t lend out all the money they receive. This is so they have enough to send it back to any savers who choose to withdraw early. 

All savings accounts with credit unions are also protected under the Financial Services Compensation Scheme (FSCS), which means even in the unlikely event the credit union goes out of business, you will still get your savings back up to £85,000.

The interest earned through lending is used for operating the credit union, improving services and paying interest to members with savings accounts. Some credit unions also pay their members an additional payment known as a dividend, if they make extra profit.

Is a credit union a bank?

Whilst credit unions operate similarly to banks, they are not the same. The main difference is that credit unions are owned by their members, whilst banks are usually owned by external shareholders whose aim is to make a profit.

There are also some differences in what they offer. Credit unions usually have a smaller range of products than banks, focusing on savings and loans (though some larger credit unions do offer other services). Banks are more likely to provide a wider range of products and services, like current accounts, mortgages and credit cards. 

Despite their differences, credit unions and banks are both regulated by the Financial Conduct Authority (FCA) and authorised by the Prudential Regulation Authority (PRA). These regulators work together to ensure both banks and credit unions operate responsibly and in the interest of their customers and members. 

What’s the difference between a credit union and a building society?

Credit unions and building societies are both financial institutions owned and controlled by their members. Like credit unions, building societies don’t have external shareholders. When they profit from lending, the money is reinvested back into the building society to offer more services to their members. 

There are a few technical differences between credit unions and building societies. For example you need to have at least £1 saved in a credit union to take out a loan with them (if you take out a loan with one of our partner credit unions we arrange for this to happen at the same time of your application to make it easier for you!). 

However, deciding whether a credit union or a building society is right for you will mostly come down to what products they offer and whether you meet their membership criteria. For example, more building societies offer products such as current accounts and mortgages than credit unions.

Why would someone use a credit union?

There are many reasons why someone might choose to borrow or save with a credit union, such as:

• Ethical banking - Credit unions don’t make profits, so the money you save, or the interest you pay when you borrow, is used to benefit members and improve services.

• Access to credit - Because of their not-for-profit structure, and ethical approach to lending, credit unions are often willing to lend to more customers than big banks. They specialise in lending to customers with a ‘fair’ credit rating, whereas some big banks look for ‘good’ or ‘excellent’ credit scores.

• Affordable credit - Credit unions are committed to providing affordable loans to their members, with fair fees and reasonable interest rates. The interest a credit union can charge for a loan is capped at an interest rate of 42.6% APR.

• Competitive savings rates - Credit unions’ not-for-profit structure means they may be able to offer better interest rates on savings accounts than high street banks.

The benefits of credit unions will vary from union to union. It’s important to do your research to find one that suits your needs and consider whether you meet their membership criteria. My Community Finance work with two credit unions, Castle Community Bank and My Community Bank. They have the widest membership criteria of any credit unions. This helps them achieve their goal of giving as many people as possible access to fairly priced and ethical financial products.