We often talk about challenger banks like Monzo and Starling as a great alternative to the more old-fashioned high street chains.
However, if you’re weary of traditional banks then app-based banking isn’t the only alternative available to you. You could also consider getting some of your financial services from a credit union. Let’s explore what they are and how they work.
What is a credit union, and how does it differ from a bank?
A credit union is a financial organisation that’s owned by the members rather than by shareholders. This means that it is designed to promote the interests of those who bank there, rather than to turn a profit.
Typically, it will provide all of the basic financial services that you would expect: current accounts, overdraft facilities, savings, loans and even mortgages.
Compared to a bank, you are likely to get a more personal service as credit unions are driven to help their community of members as much as possible.
What are the interest rates and fees?
Typically, credit unions won’t pay you any interest on your savings or account balances – one of the major drawbacks for those focussed on growing their savings. On the other hand, they also keep the interest rates charged on products such as overdrafts low and try to limit the fees that you’ll need to pay. As with banks this will vary depending on the group you go to, so it’s worth shopping around.
Although there’s no savings interest, credit unions do pay what’s known as a ‘dividend’. This means that if they make a surplus for the year the profits will be distributed to the members. The amount you get is based on how much you have saved. It is worth being aware that many credit unions won’t make a surplus every year, so this money is far from guaranteed.
The low interest and fees mean that credit unions can be particularly beneficial when you’re struggling slightly. For instance, you’re likely to save considerably with a loan when compared to taking out money from a payday loan.
What else do they offer?
The fact that credit unions are embedded in the community means that they can sometimes offer more tailored services. For instance, the London Mutual Credit Union works with 25 of the biggest employers from their local area to offer a salary deduction scheme, allowing people to save direct from their paycheque. This is a great option for people who find they tend to spend their excess money before they have a chance to save.
Other credit unions offer perks such as savings and discounts from local companies, or regular prize draws for savers with a certain type of account. Credit unions are also a very ethical place to store your money, as they will typically invest back into the local community with initiatives such as financial education for children and help for the unemployed.
How to choose your credit union
Most people will have a couple of credit unions to choose from, but keep in mind that they all have membership criteria and are typically limited to people living within a certain geographical areas. Some are also open to people who meet certain criteria – the London Mutual Credit Union, for instance, allows members of the armed forces to join even if they’re based outside of London.