On Monday, May 4, 2020 -
Credit unions are one of those things that many people have heard of, but few know much – if anything – about. So what are they? How do they work? And most importantly, could you benefit from using one? Let’s find out.
What is a credit union?
A credit union is a not-for-profit organisation that allows people to save and borrow money. They offer an alternative to mainstream loans and savings accounts, and can be a good place to turn to if you’ve been turned down by high street loan providers when you need credit.
Credit unions are traditionally set up within communities by people who have something in common, like living in the same area or working for the same organisation. They’re designed to benefit that particular group of people.
Although they’re set up and run by communities, credit unions still offer services that the law says they must get permission to offer. So, they have to be registered with and follow the rules set out by the regulators for financial services, the Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).
While some credit unions are small and relatively informal, others have branches on the high street, and websites that make it easier for people to join and manage their accounts online.
What products and services do credit unions offer?
Credit unions traditionally provide savings accounts and loans, so you will find these on offer at all credit unions. Some credit unions are also able to offer bank accounts and prepaid cards, and a few are able to offer mortgages. Not all credit unions can offer the same products and services, and what you have access to will depend on what’s on offer at the credit unions you’re eligible to join.
How do credit unions work?
In a credit union, the people who use it are known as members. Each member will have a savings account that they pay into, and if any member needs to borrow money, then the money for their loan comes from the pooled savings of all the other members. Many credit unions require you to have a savings account with them before you can borrow money, but some will allow you to take a loan without having a savings account.
Credit unions are owned by and run for their members. Joining one means you’ll get the chance to go to meetings and have a say in how your credit union is run, and you may even be able to step up and help run it! There’s no pressure to get super involved if you don’t want to, though.
Is my money safe in a credit union?
Like other savings accounts from banks and building societies, money saved with a credit union is protected by the Financial Services Compensation Scheme (FSCS). Under this scheme, if ever the companies holding your money went into administration or closed down, you would be able to recover up to £85,000 of your money per company you have an account with. As credit unions often cap the amount of money you can save with them far below this limit, it’s extremely unlikely that you’d be unable to get all of your savings back through the FSCS if your credit union closed.
Can anyone use any credit union?
In short, no. You will probably only be eligible to join one, or perhaps two credit unions. The eligibility criteria tend to revolve around something that members have in common. That thing might be living in the same town, belonging to the same trade union, or working in the same industry – the police force or the NHS, for example.
Will using a credit union appear on my credit report?
If you borrow money through a credit union, then it will more than likely appear on your credit report. If you only save money with a credit union, then this will not usually be shown on your credit report.
If your credit union carries out a credit check at the time you apply for a loan with them – which most do – then you’ll see this credit check on your credit report as a “hard search” of your file. This will usually show up on your credit report straight away, the next time you get an update.
If you’re approved for the loan, then this will appear on your credit report as an account that you have. It may be a couple of months after you took out the loan before it appears on your credit report, depending on what your credit union’s process for updating your credit report is.
As you repay the loan, or if you miss any payments, your credit union will update your credit report to show this. Once you’ve finished repaying your loan, then this will be recorded on your credit report, too.
How can I find a credit union?
You can find credit unions that you’re eligible to join by using Find Your Credit Union, which is a website run by the Association of British Credit Unions (ABCUL). You can search by where you live, where you work, who you work for, and any associations you’re part of to find credit unions that you’re eligible to join. Make sure you read the “common bond” criteria carefully – these are the things you have to have in common with other members of the credit union to be able to join.
