Credit unions should start to appear in the savings best-buy tables for the first time in the coming weeks following the introduction of new rules taking effect on Sunday. It will also be much easier to join a credit union because the membership rules are being loosened.
Credit unions are huge in countries such as Ireland, the US and Australia, but they have not taken off in a big way in the UK. Their progress has been hindered by what many feel are outdated restrictions which have limited take-up – for example, all members must have something in common. Also, credit unions can't pay interest on savings, only a retrospective dividend. The new powers should allow credit unions to provide an alternative to high street banks, and payday lenders and loan sharks. And many people will probably like the fact that credit unions are co-operatives owned and controlled by their members, with no outside shareholders to pay. Any profits they make stay in the community and are used to develop the credit union and provide a return to savers.
The changes mean that:
Credit unions will now be able to pay interest on deposits
Credit unions pay their members a dividend, which is similar to interest but, unlike banks and building societies, credit unions were not able to promise a rate in advance, as the dividend was dependent on performance throughout the year. Some credit unions pay pretty decent dividends – for example, Glasgow Credit Union paid 3% for the year ending September 2011, which is a very good for instant access cash, while 6 Towns Credit Union, catering for those in the Sandwell area of the West Midlands, says that for the past three years, its dividend has been 3.29%.
Being able to pay interest on savings will give the movement a huge boost, and make it easier for people to see how credit union accounts stack up against those offered by banks and building societies. "At the moment we can't appear in any best-buy tables. Being able to pay interest will allow us to appear in Moneyfacts," says Mark Lyonette, chief executive of the Association of British Credit Unions (Abcul), who reckons the first advertised interest rates should start to appear in a few weeks' time.
Credit unions will now be able to extend membership to more than one group of people, no matter where they live or work
Under the old system, all the members of a credit union had to have something in common, such as living in the same geographical area or working for the same employer.
This is known as the "common bond". However, these restrictive rules are being loosened. A credit union will no longer have to prove that all the people able to join its members have something in common. This means, for example, that as well as serving people who live or work in the same area, credit unions will be able to open up to new groups.
The changes don't mean that everybody will be free to join whichever credit union they want. So a credit union currently open only to people living or working in a particular London borough won't be able to open its doors to the whole of London overnight. To prevent credit unions getting too big, those with a common bond that includes a geographical area will be limited to a maximum of 2 million members.
"People should find it much easier to join a credit union because more credit unions will have more options as to who can join," Lyonette says.
Credit unions will no longer be limited to individuals
Organisations such as community groups (tenants' associations, social clubs attached to workplaces etc), local companies, social enterprises, housing providers, religious groups and local authorities will now be able to join a credit union.
Rules that mean people can lose access by moving house are being relaxed
People who leave the common bond of their credit union are classed as non-qualifying members. Under the old rules, these people were not allowed to exceed 10% of the total membership. If this limit was breached, those last in would usually be the first to be asked to leave. But the new regime allows credit unions to set their own limits, and this will prevent many people from losing access when they change their job or move out of the area, Abcul says.
Credit unions are regulated by the FSA and are members of the Financial Services Compensation Scheme, so the first £85,000 of savings are safe
To see if there is one you can join, go to findyourcreditunion.co.uk. They can sometimes offer best-buy rates for people looking to borrow smaller amounts. Some credit union loans charge borrowers no more than 1% interest a month on the actual amount owing, an APR of 12.7%. Some charge less than this – for example, at Camden Plus Credit Union in north London, rates start from 9.4%. A credit union cannot charge more than 2% a month on the reducing balance (an APR of 26.8%), Abcul says.
If you borrowed £500 over one year at a rate of 12.7%, you would pay back a total of £534.06. At a rate of 26.8% you would pay back £569.55. The loans have no hidden charges or penalties for early repayment, and life insurance is built in at no extra cost.
Comments
7 January 2012 12:19AM
I've thought for some time that switching to a Credit Union would be be only way to avoid lining the pockets of the major clearing banks.
However I don't know whether they can offer the electronic banking facilities that I've come to rely on.
7 January 2012 3:26AM
My strategy would be to put PART of my bank funds in the Credit Union and the rest in a bank. Reduce the amount the banksters can play with.
7 January 2012 9:25AM
Good news. A long overdue reform.
The common bond was a major impediment to the development of credit unions.
I like the idea of paying dividends instead of interest.
Usury is the reason we are in this mess we're in. I think this is a viable alternative as it still compensates savers (who in a credit union are providing the funds for lending) for risk and foregone consumption.
7 January 2012 10:15AM
Credit unions do not provide clearing bank facilities, in the same way that most building societies don't. Nationwide does and it is about the only one. The money you need to see you through to next pay day will need to stay in a current account.
7 January 2012 11:12AM
And about time too! These rule relaxations are one good way to celebrate the International Year of Co-operatives (IYC 2012) which has just begun.
Now UK Credit Unions need to look at ways of setting up a central clearing facility so that they can provide cross-branch electronic facilities that the banks already offer (e.g. the ability to use a CU-issued debit card in machines other than that at your own CU).
Credit Unions are huge in the USA, Canada, Ireland and Australia, and a significant, ethical, alternative to banks in those countries. We need to develop the same clout for them in the UK.
7 January 2012 1:33PM
This is great news. De-mutualisation was the start of the rot in our financial services, and the Credit Unions could be an important part of wresting our money away from the city fatcat gamblers.
7 January 2012 3:14PM
You could try the co-op bank if you wish to avoid the clutches of the major clearing banks - both the co-op bank and their internet brand Smile offer full clearing bank facilities.
If I recall correctly the Norwich and Peterborough (N&P) also provide current account facilities - N&P is now part of the Yorkshire Building Society group - still a mutual owned by its members.
8 January 2012 12:15PM
That's my old flat! In the block on the left! I was on the 12th floor, could see for miles... the sun rising over the Pennines, setting over Wales.
It's made me all whistful...
8 January 2012 1:20PM
The benefit of a credit union is that members have to establish a pattern of saving before they can borrow any money. Then they can use some of that previous regular saving to help pay off the borrowed money. It forces people to be less reliant on instant gratification. It also hopefully will steer people away from pay day loans companies that charge up to 4,000.00 per cent interest APR.
8 January 2012 6:01PM
What does a credit union do if somebody doesn't pay back their loan?
8 January 2012 10:07PM
Some positive changes there - I think the change to allow organisations to become members is particularly interesting.
9 January 2012 9:58AM
This is very welcome, and long-overdue. For those with unmanageable debts traditional banking and lending opportunities have all but dried up - often forcing those who need money quickly to turn to doorstep lending, payday loans and even unregulated loan sharks - all at crippling interest rates. Last week housing charity Shelter announced that a million people had turned to payday loans simply to meet their housing costs, that is a frightening statistic.
Credit unions are superb. Not only do they operate with the best interests of their members at heart, they take very little risks and have very reasonable caps on their interest rates. It is a shame we didn't have these changes years ago - but at least we have them now.
9 January 2012 11:38AM
Credit Unions are collaborative enterprizes owned by the shareholders. For example you could live in a community that was organized as a collaborative corporation run by a board of directors and was non-profit. Such communities are legal in many US states and are about 25% as expensive as an elected administration. Banks are beholden to all sorts of outside influences such as shareholders, bond holders, and regulators who tax and regulate and impose fees on them. Peruse an annual report if you wish to see the amount of compliance costs and costs for association dues and bonds or preferred stock expenses, lobbying expenses and such.
Valentine from Britain Loans
9 January 2012 10:38PM
Default on credit union loans are normally lower than other commercial loans as borrowers have a stake in their credit union and they understand they are borrowing other members savings.
However, credit unions do have robust credit control policies and will use all legal means available to collect outstanding loans. I guess one of the biggest differences is that credit unions are approachable and will do all they can to help members if their circumstances change e.g. reschdule payments, maybe allow a short break in payments etc.