Ditch your bank and switch to a credit union?

By Emma Lunn

Credit unions gained more than 500,000 new customers in 2012, as consumers become increasingly bitter about big banks, according to Move Your Money UK, a national campaign for more ethical banking. But what exactly is a credit union? And what should you know before switching to one?

What is a credit union?
Credit unions are financial institutions offering services similar to banks and building societies, but are structured differently in that they are financial co-operatives, meaning members get a say in how they are run.

Instead of being loaned from bank to bank, money saved with a credit union is only ever loaned to other account holders or "members." When you need a loan, the interest you are charged goes back into the union, and members receive a share in any profit at the end of the year in the form of a dividend.

"Credit unions take banking back to basics," says Louis Brooke, spokesman for Move Your Money. "They are the simplest way that a group of people can help each other to save and borrow."

Who can join a credit union?
Credit unions recently became much easier for new members to join. credit-union

Until 8 January 2012, credit unions were restricted by rules requiring that all their members had a common bond -- such as living in the same geographical area or working for the same employer. But changes in legislation mean credit union services can now be extended to new groups much more easily. For example, according to the Association of British Credit Unions, a single credit union can provide services to a variety of employers, community groups and residents of various geographical areas, all under one roof.

Still, it will take credit unions some time to overtake banks as consumers' primary financial resource.

 "...Credit unions in the UK are still relatively small compared to, say, the States," Brooke says. "That means that, although your money is just as safe with a credit union as with a bank -- all deposits up to £80,000 are insured by the government -- that the level of service can vary significantly between credit unions."

Should I switch to a credit union?
Although you might be happier saving or borrowing money from a credit union, they tend not to offer table-topping rates. If earning the most interest on your savings or getting the cheapest loan rate is your first priority, you may be better off with a bank.

That said, a credit union might be keener to lend members smaller amounts (between £100 and £3,000) than a bank, even if they have poor credit. While some banks do offer tantalizingly low loan APRs, they often will require you to borrow at least £5,000 to get those rates. Interest rates for loans of all sizes at credit unions, meanwhile, are currently capped by the government at 2% per month (which translates into an APR of 26.8%). That's quite a bit lower than the interest rates charged to those with poor credit for other sources of small, short-term loans. APRs on credit cards for people with poor credit, for example, can reach above 30%, and APRs on payday loans can reach even higher than that.

However, if it's a credit card you're after, be aware that most credit unions in the UK don't offer them. Some offer debit cards tied to bank accounts, as well as prepaid cards that can be used at ATMs and in shops.

"Lots of credit unions only offer savings accounts and loans, which means that, unlike your bank, you probably won't be able to meet all of your financial needs from the same place," Brooke says.

To find a credit union near you, visit findyourcreditunion.co.uk, run by the Association of British Credit Unions.

See related: Don't want a credit card? Here's why you might need one, How to complain about your credit card

Published: 28 January 2013