Tell me about...Credit Unions

Credit unions have enjoyed greater popularity over the last year or so as consumers disappointed by the banks’ failure to manage their interests have sought alternative homes for their cash.

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They are also likely to begin serving the needs of more people in Britain thanks to legislative changes being finalised at the moment (see below).

But many Britons do not really know how these financial organisations work – even though the credit union movement is well known in other parts of the world.

In Ireland, for example, one in two people belong to a credit union, while one in four Americans are credit union members. On some Caribbean islands, penetration is more than 70%.

There are currently 352 credit unions operating in the UK, according to industry body the Association of British Credit Unions Ltd (ABCUL).

What are credit unions and what do they do?

Credit unions are financial co-operatives that are owned and controlled by their members, making them closer in structure to mutually owned building societies than traditional high street banks.

Credit unions also have a “common bond” that determines who can be a member. This may, for example, state that all members must live or work within a certain area, work for the same employer, or belong to the same association, such as a local church or trade union.

Anyone keen to join a credit union must therefore find one that is either in the local area, or linked to his or her life in some other way.

What products do they offer?

Credit unions offer a similar range of products to that available from high street banks and building societies. This includes current accounts, savings accounts, loans and Child Trust Funds.

They are unlikely to match the best buys available on the high street, but they are still popular with some savers and borrowers because they are simple and are managed on a very personal level.

For example, the savings schemes run by credit union are user friendly in that they allow people to save as much or as little as they like as often as they wish.

You can usually pay money into your account direct from your wages, or at collection points located in local shops and public buildings.

They differ from traditional savings accounts in that they pay an annual dividend that depends on the union’s performance and usually works out at between 2% and 8%, rather than a pre-determined rate of interest. They also include life insurance at no extra cost to the member.

Like credit union savings accounts, the loans on offer to members are simple in that they do not impose hidden charges or penalties for early repayment. They also include life insurance that will repay the loan in the event of the borrower’s death.

There are some restrictions, however. Most credit unions cannot lend on an unsecured for more than five years, or for more than 10 years secured – although some can offer secured loans that last for 25 years.

You may also find a loan from a traditional lender a cheaper option – especially if you have a good credit record. Credit union rates vary, but range from about 12% to 25% and cannot by law be higher than 26.8%. However, the leading loan rates from traditional lenders are around 8.0%.

Is my money safer with a credit union than with a bank or building society?

One of the advantages of credit unions for those disillusioned with the banking system is that they do not have any external shareholders. However, this fact also makes them more prone to collapse as they cannot raise funds externally should they hit troubled times.

That said, any money placed with a credit union enjoys the same protection from the Financial Services Compensation Scheme (FSCS) as cash saved with a high street bank or building society. In the event of a collapse, you are therefore protected up to £50,000 per member.

Credit union members also have the option of seeking compensation from the Financial Ombudsman Service if they are unhappy with the resolution of a complaint.

Is there anything else I should know about credit unions?

The Credit Unions Act 1979 states that the organisations should promote thrift by offering savings schemes, provide credit at reasonable rates of interest to their members, use the monies given to them by savers for the mutual interests of the union and its members and offer financial education and advice.

It also says that all credit unions must have their accounts audited annually by a qualified auditor, and that they must be insured against fraud and theft.
Since then, however, regulation of credit unions has come under the auspices of the Financial Services Authority (FSA).

The performance of each union has been monitored by the FSA since July 2002, while the watchdog must also judge all those involved in the running of a union suitable.

What will the legislative changes being finalised at the moment mean for credit unions?

As mentioned above, the structure of credit unions is likely to undergo some changes in the near future.

The government has been investigating ways to make credit unions more modern and accessible for the last two years.

One of its plans is to widen the scope of the common bond that links members and to increase the number of people who can be included in a geographical common bond to two million.

Most credit unions currently only have about 1,000 members each, with the largest – Leeds City Credit Union – at 20,000.

The widening of the common bond could therefore mean much larger organisations in the future.

ABCUL has welcomed this as a way for credit unions to reach many more members of the community.

Mark Lyonette, chief executive of ABCUL, said:  "We are delighted that the Government has listened to our calls to increase the limit for a common bond to two million people for geographical common bonds only and not to impose a numerical limit on common bonds which only cover people with an employment or associational link. This will enable credit unions to meet the needs of many more people.”

But there are those who fear that this will signal the end of the personal service levels that have made credit unions popular, and differentiated them from the banks.

Other changes likely to come in include new savings schemes that they offer an agreed interest rate rather than an uncertain dividend. Again, however, this has been criticised as diluting the credit union offering and bringing it more into line with that available from banks and building societies.

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