What Is a Credit Union?
Credit unions have been around for generations, but they're still a bit of a mystery to many people.
How did credit unions start? How are they different from banks? Who can join one? And what do they actually do with your money?
Here's a simple guide to how credit unions work, why people join them and how they support the Armed Forces community.
In this guide
- What is a credit union?
- Where did credit unions come from?
- What does a credit union do?
- How is a credit union different from a bank?
- Who can join a credit union?
- How can the Armed Forces community join First Defence Finance?
What is a credit union?
A credit union is a member-owned financial co-operative.
In simple terms, people join a credit union to save, borrow, and access financial services. By becoming a member, they also become part-owners of the organisation.
Unlike a bank, which is generally owned by shareholders, a credit union is owned by its members.
Credit unions are not-for-profit organisations. They still need to earn enough to operate, invest in their services, and remain financially strong, but their purpose is to serve their members rather than external shareholders.
UK credit unions are regulated financial organisations. For example, First Defence Finance, one of three credit unions selected by the Ministry of Defence to provide serving Armed Forces personnel, veterans, and their families with simple savings and affordable loans, is a trading name of Plane Saver Credit Union Ltd, which is authorised and regulated by the Prudential Regulation Authority and Financial Conduct Authority.
Where did credit unions come from?
The idea behind credit unions began in Europe during the 19th century.
The first modern credit unions appeared in Germany in the 1850s, based on a simple idea: people could save together and make credit available to members of their community.
The movement spread around the world.
In Britain, credit unions began to develop during the 1960s. Some early organisations were established by local communities, including Caribbean immigrants who brought experience of credit unions with them.
In 1979, the Credit Unions Act created a legal framework for credit unions in Great Britain.
Today credit unions have evolved to become established, regulated financial institutions, but the basic idea remains much the same:
Save together. Borrow responsibly. Support members.
What does a credit union do?
At its simplest, a credit union helps its members save and borrow. Depending on the organisation, it may also offer other financial services and member benefits.
You can save
Credit unions usually offer savings accounts that help members put money aside regularly.
Depending on the credit union and the account, savings may earn interest or an annual dividend. Unlike interest, a dividend is not guaranteed and depends on the credit union’s rules and financial performance.
Different accounts can serve different needs, from everyday savings to money set aside for a specific goal.
You can borrow
Credit unions offer loans to eligible members. Rates, loan amounts, and repayment terms vary, so it's important to compare the total cost of borrowing and check what you can comfortably afford.
Many credit unions also aim to support responsible borrowing, helping members understand their options rather than taking on repayments that put pressure on their finances.
How is a credit union different from a bank?
The biggest difference comes down to ownership.
With a credit union, you're not just a customer. You're a member.
Credit unions are owned by their members, and eligible members can usually vote on certain matters, following the credit union’s rules. This is often described as the principle of "one member, one vote."
Banks and credit unions can offer some similar services, but their ownership structures and purposes differ.
That doesn't mean every credit union offers the same products, rates, or services as every bank. It's still important to compare the options available to you.
Who can join a credit union?
You can't necessarily join any credit union you choose.
Credit unions have something called a common bond. This is the connection that makes someone eligible to become a member.
It could be based on:
- Where you live
- Where you work
- Your employer or industry
- An organisation or association you're part of
- Your family connection to an existing member
- A combination of these factors
The rules are different for each credit union, so it's worth checking the eligibility requirements before applying.
How can the Armed Forces community join a credit union?
If you're serving in the Armed Forces, work for the Ministry of Defence, are a British military veteran or are an eligible family member, First Defence Finance may be an option to explore.
First Defence Finance was one of three credit unions selected by the Ministry of Defence to provide members of the Armed Forces community access to an alternative way to save and borrow.
Through First Defence Finance, eligible members can:
- Savings directly from MOD payroll to help build a financial cushion and plan for future costs.
- Borrow affordably for planned purchases and other financial needs, subject to affordability and eligibility checks.
- Access member discounts and financial guidance to help make money management easier.
To learn more about this scheme, including how it works and how to sign up, read First Defence Finance’s blog:
What is the Payroll Saving Scheme? →
Find out more about First Defence Finance
A credit union offers a different approach to financial services: one built around membership rather than external shareholders.
If you're part of the Armed Forces community, First Defence Finance can help you explore savings, borrowing and other member benefits designed for eligible serving personnel, veterans and their families.
Find out more about First Defence Finance on our website →
Check the eligibility criteria and product terms to see which services may be suitable for you.
