Can you save more by using credit unions?
Savers and borrowers in the UK are getting a raw deal from high street banks. Low interest rates mean there's little chance of making a decent return on your money, while tight lending criteria have made it harder than ever to borrow.
But there is a solution. Credit unions pay decent rates on savings accounts and offer cheap loans.
Once known as the ‘poor man's bank' because of its policy not to reject anyone due to their circumstances, these financial co-operatives are enjoying considerable success. In fact, 826,557 adults and 114,005 children have credit union accounts across the country, and membership has increased by 225% over the past 10 years.
Credit unions exist as not-for-profit institutions that are owned and controlled by their members - you become a member when you become a customer. There are about 500 in the UK offering savings and loan products, and some of the bigger unions also provide current accounts and mortgages.
Although the size of a credit union and the number of products on offer can vary a great deal, the one thing that remains constant is the common bond - to become a member you must meet a credit union's requirements, which usually relate to where you live, work or socialise. For example, to become a member of the Glasgow Credit Union you need to live or work in the area.
"Credit unions can be made up of five members in a local church or 20,000 people in a region," says Joan Driscoll, manager of the London Mutual. They differ from traditional banks and building societies because any profits made are returned to members in the form of a dividend. They are also safer than traditional financial institutions as they are not allowed to lend out all their members' savings or invest the remainder in anything that carries too much risk.
Just as with banks and building societies, all money up to £85,000 per member is also guaranteed by the Financial Services Compensation Scheme.
WHAT'S THE BIG ATTRACTION?
Many people sign up to a credit union in recognition of its ability to benefit the wider community. Brenda Smith, 43, signed up to the Eighth Day Co-operative credit union at her local church in Manchester. She says she was attracted to its fair and ethical values so opened a savings account, and started putting away £100 a month.
"By moving my money to a credit union, I can help others have access to funds which may not have otherwise been available to them," she says.
Brenda's reasons for joining are not unusual, Paul McFarlene, spokesperson for the Glasgow Credit Union, says the biggest group of members is made up of those who are fed up with their traditional bank and want to use their money to help local people.
"Credit unions offer redistribution of wealth, and to have a fair society people should have the same opportunities as others. By having my money in a credit union I feel I can contribute towards this," says Brenda.
ARE THE RATES COMPETITIVE?
Credit Union offers loans of between £5,000 and £9,999 for 8.9%. Although these may not be market-leading, because no one is excluded they provide a suitable borrowing option for people who may be rejected from some of the top loans on offer on the high street.
Credit unions also differ from high street banks in that they have to try to help customers. The Credit Unions Act 1979 says they must encourage members to save as well as borrow and train them to use money wisely. For example, many unions provide free financial education classes in schools.
SO WHY AREN'T WE ALL JOINING IN?
One reason is the way the credit unions have historically paid out to savers. At the moment, their savings products pay out a dividend instead of interest. "This can be confusing to consumers as many people associate dividends with investments rather than savings, so it can put people off," says McFarlene.
However, change is afoot. The Credit Unions Act is currently being adjusted to allow credit unions to pay interest, which will not only make them easier to understand but will also allow them to be included by the comparison websites. Credit unions will also be able to expand their common bond to accept more members, not just those living or working locally. Membership is also being broadened to include businesses, social enterprises and community groups.
This will put credit unions on a level playing field with the high street banks and there's expected to be a boom in membership as consumers sit up and take notice of this very real alternative to traditional banking.
You can find your local credit union at findyourcreditunion.co.uk
If you own shares in a company, you’re entitled to a slice of the profits and these are paid as dividends on top of any capital growth in the shares’ value. The amount of the dividend is down to the board of directors (who can decide not to pay a dividend and reinvest any profits in the company) and they will be paid twice yearly (announced at the AGM and six months later as an interim). Dividends are always declared as a sum of money rather than a percentage of the share’s price. Although dividends automatically receive a 10% tax credit from HM Revenue & Customs (HMRC), which takes the company having already paid corporation tax on its profits into account. Dividends are classed as income and, as such, are liable for personal taxation and so shareholders have to declare them to HMRC.
Used by the holder to buy goods and services, credit cards also have a monthly or annual spending limit, which may be raised or lowered depending on the creditworthiness of the cardholder. But unlike charge cards, borrowers aren’t forced to pay the balance off in full every month and, as long as they make a stated minimum payment, can carry a balance from one month to the next, generating compound interest. As the issuing company is effectively giving you a short-term loan, most credit cards have variable and relatively high interest rates. Allowing the interest to compound for too long may result in dire financial straits.