What is a Credit Union?
A credit union is a not-for-profit cooperative financial institution that is owned and controlled by its members, through the election of a volunteer Board of Directors elected from the membership itself. Only a member of a credit union may deposit money with the credit union, or borrow money from it.
A credit union differs from a traditional financial institution (banks, savings and loan, etc.) in that the members who have accounts in the credit union are the credit union's owners. A credit union is a co-operative institution, with policies governing interest rates and other matters set to benefit the interests of the membership as a whole. As such, credit unions have historically marketed themselves as providing superior member service and being committed to helping members improve their financial health.
Credit unions typically pay higher dividend (interest) rates on shares (deposits) and charge lower interest on loans than banks. Credit union revenues (from loans and investments) do, however, need to exceed operating expenses and dividends (interest paid on deposits) in order to maintain capital and solvency. The lowered profitability of most credit unions relative to banks is indicative of credit unions' focus on serving members, whereas banks must be concerned with maximizing profits in order to enhance stock performance.
UK credit unions are classified under two types, type 1 are the smaller CUs while type 2 are larger. From November 2006 many type 2 CUs will be offering their members debit card accounts. For the first time this will enable CU members to obtain funds from any Link ATM. UK CUs will not be offering cheques as these are generally being phased out for many UK financial transactions. Many CUs are offering most of the services available from other financial institutions such as direct debits and standing orders.
Currently there is a government financial initiative mainly being operated by Credit Unions to bring financial services to the disadvantaged of society. One aim is to significantly reduce the influence of door step lenders where a £300 loan over 30 weeks involves paying back around £450. A credit union loan would require paying back around £325.