Credit union or bank: which suits your money

A credit union is a not-for-profit financial provider owned by the people who save with it, and members decide how it is run¹. A bank is a business that tends to be owned by its shareholders³. That single difference shapes everything else: what each one offers, what it charges, who it will lend to, and what happens when something goes wrong.

For most people the honest answer is that a credit union and a bank do different jobs. A credit union is built around savings and loans, and by law it cannot charge more than 3% a month interest on a loan, an APR of 42.6%⁴. Many credit union loans cost far less than that, with 1% a month on the reducing balance, an APR of 12.7%, common⁴. A bank offers the full range of day-to-day banking, including overdrafts, mortgages and business lending, which a credit union cannot match in the same way⁵.

So the practical question is not which is better in the abstract, but which fits what you need the money to do. If you want somewhere to save small amounts regularly and borrow affordably, a credit union can do that well. If you need a current account with an overdraft, a mortgage, or instant card payments everywhere, a bank is usually the only one of the two that can help.

A credit union is owned by its members, a bank by its shareholders

Credit unions are non-profit financial institutions owned by members who hold savings in the union⁷. That ownership is not a slogan: members involved in the credit union decide how it is run², and as a member you have a say in how your financial service provider is run⁸. Banks work the other way round. They tend to be owned by shareholders, and the bank's job is to produce a return for them³.

In practice this changes what each one is trying to do. Credit unions are not-for-profit community lenders providing affordable loans and savings⁶, and they historically offered simple savings and loan products to people shut out of mainstream finance⁹. Members' savings are used to fund loans to other credit-worthy members¹⁰, so the money in the pool comes from the people using it.

That does not make a credit union a charity, and it does not make it automatically cheaper for everything. It means the surplus goes back into the membership rather than to outside owners. The trade-off is scale: a credit union is usually much smaller than a bank, which is why its product range is narrower and why some services, such as a branch on every high street, are simply not available.

What a credit union offers compared with a bank

A credit union provides loans, savings, bank accounts and other services to its members¹. All credit unions offer savings and loans¹¹, and services vary by branch: they can include savings accounts, loans, foreign exchange and prepaid debit cards, and some offer current accounts¹². Some also offer electrical and household goods that you pay for in weekly instalments, often much cheaper than the high street equivalents¹³.

A bank covers a wider field. A credit union is not a bank and cannot offer overdrafts, mortgages, electronic banking services and payment methods or business loans in the same way as a bank⁵. That is the clearest dividing line between the two.

On cost, the picture is mixed and worth stating plainly. Credit unions can be a more affordable alternative to banks or expensive payday loans, and they sometimes offer cheaper loan rates¹⁴. But credit union loans are often more expensive than personal loans from a bank or building society¹⁵. The reason both are true is size: a credit union loan is usually a smaller sum, lent on different terms, to someone a bank may not lend to at all.

Loan costs: credit unions capped at 3% a month

The interest a credit union can charge is limited by law¹⁷. The maximum is 3% a month, an APR of 42.6%⁴, and the same 3% monthly cap applies to hire purchase and conditional sale agreements⁵. This is not a recent invention: the limit was raised from 2% a month to 3% a month by the Credit Unions (Maximum Interest Rate on Loans) Order 2013¹⁸.

The cap is a ceiling, not a price list. Many credit union loans cost 1% a month on the reducing balance, an APR of 12.7%⁴. That is the figure most members actually meet, and it is why credit unions are described as providing loans at low interest rates².

Two things follow for a borrower. First, the cap protects you from the kind of pricing that high-cost credit can reach, which is why the regulator has pointed people who want to avoid high-cost credit towards credit unions¹⁷. Second, a cap is not a guarantee of the cheapest deal for you personally. If a bank will lend you a larger sum at a lower rate, the credit union is not automatically the better option on cost alone. What the credit union offers is a predictable, capped price on a smaller loan, often to someone whose circumstances would rule out the bank.

Who can join a credit union: the common bond

All credit unions in the UK may only accept members who have a common bond⁷. Membership is based on that bond²¹, and it can be based on where you live or work, the type of occupation you have or your employer⁷. In practice that means living, working, studying or volunteering in a certain area, working in the same industry or for certain employers, or belonging to the same trade union¹.

The bond is wider than it first sounds. Anyone in the house of a person with a common bond with a credit union can usually join², and as long as one member of a family meets the common bond requirements and has joined, the other family members living at the same address can usually join too¹¹. So a household link is often enough even if the bond itself is your partner's or your parent's.

Joining is not automatic and not instant. You need to visit or call your chosen credit union to confirm what information you need to join²¹, and you will usually need to provide two recent documents to prove your identity and address, such as a passport, driving licence, student or work ID card, bus pass, birth certificate, bank statement or energy bill¹. There is often a small membership fee, for example £2, or a requirement to save a certain amount such as £10¹.

Most local areas have a credit union². The Find Your Credit Union website can help you locate one¹¹, and credit union finders are listed separately for England, Scotland and Wales, and for Northern Ireland¹.

Borrowing from a credit union with a poor credit history

This is where credit unions differ most from banks. They provide access to fair and affordable credit for people with a poor credit history, and help those who cannot access mainstream forms of credit or who may be unaware of affordable providers⁶. They are described as good for those who find it difficult to borrow from banks due to having a poor credit history²².

Part of the reason is regulatory. Most of the loans that credit unions provide are specifically exempt from the Financial Conduct Authority's Consumer Credit sourcebook, known as CONC²³, and the standards applied, for example the level of checks a lender may have needed to do before lending, will typically be lower than those imposed on lenders and loans covered by CONC²⁴. Credit unions are also exempt from certain rules and regulations that apply to other financial services providers²⁴.

That does not mean no checks. Credit unions always consider affordability when assessing loan applications⁶, and they normally use manual checks to decide whether to lend¹. You usually will not have to pass a credit check, even if you apply for an overdraft¹.

A poor credit rating still matters, and it is worth being clear about why. Having a bad credit rating will make it more expensive and harder to borrow money²⁵. If you have a bad credit rating and have been refused bank accounts, you could ask to open a basic bank account or see if you can open an account with a credit union²⁶. In Scotland, the Scottish Community Lenders Fund supports credit unions and Community Development Financial Institutions that offer financial help to individuals with poor credit history⁵.

How much you can borrow, and whether you must save first

Borrowing limits are set by each credit union's own loan policy. A common rule is that you can usually borrow at least two or three times the amount you have in savings, depending upon the loan policy of your credit union²⁷. Many credit unions focus on smaller sums: personal loans of up to about £3,000⁴, with loans starting from £50⁶.

Whether you must save before you borrow depends on the credit union. Some will lend to you as soon as you become a member, while others only after saving for a set period¹¹. Some will ask you to build savings first². Where savings are required, the amount you can borrow is often tied to what you have saved, which is why the two figures move together.

If you join a credit union and start saving with them, you will also be able to apply to borrow money once you have proved you are a reliable saver²⁹. That is the model in one sentence: regular saving demonstrates reliability, and reliability unlocks borrowing.

Paying in, withdrawing and day-to-day access

Day-to-day access is where a credit union most often falls short of a bank, and it is worth knowing the details before you move your money.

For free, you can usually pay in or take out cash at the credit union, have money paid in such as wages, benefits and pensions, use online, mobile or telephone banking, and get budgeting advice and support¹. Members can pay in directly by payroll deduction or through benefit direct accounts, through retail payment networks such as PayPoint and PayZone, by standing order or direct debit, or in cash at local offices and collection points²¹. Other routes include payroll deduction from wages, Direct Debit or standing order, cash at a credit union office or collection point, State benefits paid in directly, and PayPoint cards in some places¹¹.

Getting money out works differently too. Options include cashing a cheque at a local Post Office, cash from a local credit union office, payment directly into a bank account, or a debit card at a cash machine if the credit union operates a current account¹¹.

Benefits can be paid into a credit union account. Benefits are usually paid straight into your bank, building society or credit union account³⁰, and Universal Credit is paid into your bank, building society or Credit Union account³¹. Universal Credit is paid once a month, directly into a claimant's bank, building society or credit union account³².

Access is not evenly spread. In 2024, 21% of adults aged 55 or over, or younger adults with a health condition or illness, said they found getting to a bank, building society or credit union difficult, up 4 percentage points since 2022²⁹. If getting to a branch is already hard, a credit union with a local service point may be easier to reach than a bank, or it may not be.

Where a credit union cannot replace a bank

The limits are set partly by law and partly by size, and they are firm.

A credit union is not a bank and cannot offer overdrafts, mortgages, electronic banking services and payment methods or business loans in the same way as a bank⁵. The Payment Services Regulations 2017 do not apply to credit unions, municipal banks and the National Savings Bank³³, and credit unions are not payment service providers for the purposes of those Regulations³⁴. The Payment Systems Regulator has excluded credit unions, municipal banks and national savings banks from the scope of its reimbursement policy for authorised push payment scams³⁵, and CONC 5D does not apply to a credit union³⁶.

What that means in plain terms: if you want the full protections and conveniences that come with a modern bank current account, including the reimbursement rules for scams, a credit union account is not a like-for-like substitute. Many people use both, keeping a bank account for everyday payments and a credit union account for saving and borrowing.

Protection and complaints: FSCS and the Financial Ombudsman

Savings in a credit union are protected by the Financial Services Compensation Scheme, exactly the same protection as savings in a bank or building society¹⁸. Loans and savings are protected by the scheme⁶, which is set up to protect you if your bank, building society or credit union runs into financial difficulty³⁷. You will get your money within seven working days of a bank, building society or a credit union failing³¹.

If something goes wrong with the service rather than the firm's finances, complaints can be taken to the free Financial Ombudsman Service if you are unhappy with the final response or the timeframe has passed¹. The ombudsman can help with complaints about bank accounts and bank cards, insurance for your home, car or travel, and problems with loans³⁸. For consumer credit complaints it covers payday loans, the affordability of the lending, and being unhappy with the quality of goods bought or hired with credit³⁹.

If a complaint is about a bank, building society or credit card company and the firm's own complaints procedure has not resolved it, you can complain to the Financial Ombudsman Service, telling them that a debt collector or creditor has broken the terms of the Standards of Lending Practice²⁷. The service is free to use.

Free, impartial help is available if you are struggling. MoneyHelper covers credit unions and basic bank accounts, and free debt advice charities can look at your whole position. If you are behind on a credit union loan, talking to the credit union early is usually better than waiting, and the ombudsman exists precisely for the cases where that conversation does not resolve things.