If you want to save, there’s an alternative to a bank or building society account – and that’s a credit union. Find out how credit union savings accounts work.
What is a credit union?
A credit union is essentially a community bank that’s owned and run by and for its members. Credit unions offer low cost loans and savings accounts – and some offer more products, such as mortgages and short term loans (much cheaper than payday loans).
Credit union savings accounts
Credit union savings accounts work in a slightly different way to bank savings accounts. The main differences are:
- Credit union savings accounts are generally ‘regular saver’ accounts, meaning you have to pay in some money every month. However, the minimum amount you have to pay in every month is normally quite low (it can be as little as £1).
- Credit union savings accounts don’t generally pay interest. Instead they pay a dividend, which is a share of the credit union profits.
- Credit union savings accounts include savings protection. This means that if you were to die, the credit union would pay out a lump sum equivalent to the amount you have in your savings account (there’s normally an upper limit, which could be around £5,000).
- When you open a savings account with a credit union, you become a member of it. You have to be a member of a credit union before you can take out other products, such as a loan.
Credit union savings rates
Like bank and building society savings accounts, savings rates on credit union savings products vary from credit union to credit union and from one product to another. As I write this, I’ve seen some credit unions paying a dividend of 1.5% on regular saver accounts, and others paying 0.2%.
People don’t just take out a regular saver account with a credit union for the interest rate; there are other reasons as well:
- To get access to low interest rate loans. You can only borrow from a credit union once you’ve opened a savings account and become a member.
- To get into the regular savings habit. Starting to save can be hard and many people like the community aspect of a credit union. If you join a credit union linked to your job, you can have regular savings payments taken straight from your wages (or you can pay by direct debit, if you prefer).
Other savings accounts
Credit unions offer a range of savings accounts, although not all credit unions offer all the accounts I’ve listed below.
- Regular saver account
- Children’s savings accounts
- Christmas savings account
- Cash ISA
- Holiday savings account
- Instant access savings account
- PrizeSaver account. This is a new account which some credit unions are offering. Instead of earning interest or a dividend, members are entered into a prize draw every month and could win up to £5,000. Not all credit unions offer this account.
SAVVY TIP: The PrizeSaver account is a trial scheme, backed by the government, which will run until March 2021.
How is your money protected?
Any money you have in a savings account with a credit union is covered by the Financial Services Compensation Scheme in the same way that bank and building society savings are covered (up to a limit of £85,000).
SAVVY TIP: A number of credit unions have collapsed over the years – over 55 have failed since 2011, affecting over 70,000 members. When a credit union goes bust, the Financial Services Compensation Scheme steps in and repays members’ savings (up to £85,000, but savings amounts in these accounts tends to be relatively low). However, it is a bit unnerving that so many of these small-scale community-based providers have gone bust.
How to find a credit union
You have to have some kind of ‘connection’ in order to join a credit union. It could be that the credit union is based near where you live or work, or it could be linked to your job (there are credit unions for members of different police forces and the NHS), or it could be linked to an association or church you’re a member of.
You can find a credit union at Find Your Credit Union, which is operated by the Association of British Credit Unions.
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