Credit Unions offer a financial lifeline to thousands, but are they safe?
Despite the financial gloom of 2008, one area of financial services is having a pretty good year.
Credit unions have been publicly supported by the Archbishop of Canterbury, 10,000 of their newly-launched current accounts have been opened, and Government proposals are set to ease restrictions on their activities, making them more accessible. Plus the Financial Services Compensation Scheme (FSCS) announcement this week that it will protect the first £50,000 of deposits should reassure consumers that there are viable alternatives to big banks.
Not bad, but what are they?
Credit unions are financial co-operatives, owned and controlled by their members. Like banks and building societies they offer savings and loans, and many now provide ISAs and Child Trust Funds.
Each credit union has a "common bond" which determines who can join it. It might be for people living in the same area or working for the same employer.
For example the Copperpot Credit Union is for serving and retired police officers while the Money Spinners Credit Union is open to those living and working in Hattersly, Mottram or Broadbottom in the Hyde area of Manchester. In fact Manchester alone has 18 credit unions registered to the Association of British Credit Unions Ltd (ABCUL).
At the end of September 2007, ABCUL's 346 credit unions were managing over £333m of members' savings on behalf of over 490,000 people.
Benefits
Credit unions are generally aimed at those on a low income, or in financial difficulty. They offer transparent financial products, allowing people to save weekly or monthly, or to borrow small amounts without set-up costs or early repayment charges.
The staff are well trained in helping people manage their finances and deal with debt. Unions offer reasonable rates of interest on loans (usually no more than 12% APR) and pay annual dividends on savings depending on what's left in the pot - typically around 3%.
Kitty Usher MP champions credit unions and said recently that they create a sense of trust and loyalty that companies can't, reaching people and communities that no-one else would.
Drawbacks
The rates on products are reasonable but better deals can be found elsewhere. Of course, credit unions are not aimed at `rate tarts' and they provide good deals to those who wouldn't otherwise shop around.
But if you have a large amount of money to save or borrow, or you are keen to research the market, you can make your money work harder for you on the high street. Loans are available at almost half the rate charge by credit unions (though most banks impose fees) and deposits can attract twice the interest rate often paid by unions.
How safe are they?
Credit unions are regulated and authorised by the Financial Services Authority plus each has a Supervisory Committee checking that it is taking care of members' money. An auditor carries out an annual inspection of their business and they are required to have insurance protecting against fraud or theft.
Members of unions with savings are protected by the Financial Services Compensation Scheme, and the recent announcement that 100% of savings up to £50,000 will be protected should safely cover the majority of credit union savers.
However, credit unions are still more likely to fail than a bank or building society. In its last published report the FSCS said there was an increase in the number of claims from credit union members in 06/07 to 1,025, and that this represented new challenges.
That said, credit unions provide an invaluable financial service to those most in need and Government proposals to modernise the organisations will make them more attractive in the future.
Usher announced legislation that will open up access to more consumers, such as the scrapping of the common bond requirement. Unions may also be able to offer more financial products and start paying interest on deposits.
Changes are afoot within credit unions and they could be worth taking a look at. Above all, they are one of the only genuine community banking services still available.
More: Community Banks That Treat You Fairly | A Stronger Safety-Net For Savers