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Credit unions: what are they and how do they work?

Could a credit union be beneficial to you? Offering community savings and loan cooperatives, credit unions can give lower interest rates and encourage people to save money.

As a not-for-profit entity, the focus is on supporting members rather than paying out to shareholders.  

what is a credit union

To be a part of a credit union, you must share a common bond with other members. This can be based on things like location, or an employer.

With an array of benefits, it’s worth learning about the advantages that saving with a credit union can offer – particularly as the cost of living rises. This way, you can establish whether it’s an option that works for you.   

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What is a credit union? 

A credit union is a financial cooperative that offers members a range of traditional banking services such as savings and loan accounts.

With your money saved in a credit union, you and other members pool your savings together to lend to each other; it is run for the benefit of members, rather than as a money-maker.  

Each individual credit union sees its members united by a common bond. This may be that they live in the same area, belong to the same trade union or work for the same employer.

Due to the community-run nature of credit unions, they can be small or large in scale, and are exempt from tax.  

How does a credit union work? 

The model for credit unions is fairly simple. Members pool their money together in what is technically then ‘buying shares’ in the cooperative.

This pooled money can then be used to provide loans, demand deposit accounts and other financial services, all for the benefit of members.

Credit unions run on a not-for-profit basis, so any income that is generated is injected back into projects and services that serve the community and members of the credit union.   

Borrowing money from a credit union

In order to get a loan from a credit union, you need to be a member – but there are advantages in doing so.

The most common banking services offered by credit unions are savings accounts and loans.

The benefit of the latter is that since credit unions do not operate to make a profit, they charge low rates of interest which are capped at 3 per cent a month or 42.6 per cent APR in England, Scotland and Wales.

In Northern Ireland, that cap is 1 per cent a month or 12.58 per cent APR. 

Credit unions are particularly advantageous for smaller loan amounts of £3,000 or less, since the lending rates offered present a much fairer alternative than payday loans or home credit.  

One of the barriers for many people looking to borrow money from a standard bank is a low credit score.

Often, if you have bad credit, you will not be eligible for a loan. However, credit unions are more flexible, meaning they can offer borrowing opportunities that normal banks wouldn’t.

So, if you have been turned down for a loan elsewhere, a credit union could present a viable alternative.   

Saving with a credit union 

Credit union savings accounts offer a more flexible way of saving, allowing members to save ‘what you can, when you can’.

Whether you want to place your money into your account via a collection point, by direct debit or have it deducted straight from your wages, is up to you.

But as part of your membership, you may be able to take advantage of a fixed rate of interest on your savings – or else a yearly payout, also called a dividend.

The latter is the most tangible way that credit unions can share profit with members. Savings and loan protection insurance also come as part of a credit union account.    

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Advantages and disadvantages of joining a credit union 


  • Lower fees: Thanks to the not-for-profit model of credit unions, they offer the attractive benefit of lower fees and charges than you might expect from a traditional bank 

  • Lower loan rates: Similarly, credit unions can also offer lower loan rates, which are capped across the UK at varying degrees  

  • Personalised service: Since credit unions serve a specific community, members can expect a far more personal service than one offered by a national or international bank. They likely go above and beyond to look after members, and offer support with their individual financial needs 

  • Community investment: Your credit union membership will mean you’re part of a community. With this in mind, the profit made by your credit union is paid back into your community, helping to directly impact the lives of members for the better  


  • Exclusivity: Not everyone can be a part of a credit union. Since they are founded around specific communities, you’ll need to find one that you are eligible for 

  • Accessibility: The benefits of a community-based service also have the downside of limited accessibility. You may not have the ease of ATMs and branches where you can readily deposit cash, unless your credit union is part of a shared branch network. And while banking is becoming increasingly digital, credit unions may also be slightly behind in their tech offering; unlike big banks, they may not offer mobile apps or online banking 

  • Service restrictions: Although credit unions often provide a wide range of services, each is different in what it offers members – meaning you may still need a bank service for some everyday needs  

How to join a credit union

To join a credit union, you can use search tools such as FYCU to help you find one that you are eligible for. You then need to contact them to confirm the information required to join, and they will likely offer you more details about the application process.

Most credit unions have a website that offers contact details, and many offer online application services.  

How do I know if I’m eligible? 

You will be eligible to join a credit union if you meet a certain set of criteria, also known as a ‘common bond’.

Each credit union has a different common bond, so you’ll have to look into this as part of your research process. However, you will not be restricted based on your financial situation.  

In the face of a financial downturn, more people are seeking ways to protect their money.

Doing so is easier with expert help, so let us help you find your perfect financial adviser today.  

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About the author
Kate has written for leading publications and blue chip companies over the last 20 years.