Over the last eighteen months the word credit has been at the top of many media stories, usually for all the wrong reasons.

We have had a world-wide recession which is probably still far from over. But what, if anything, do you know about Credit Unions?

Basically a Credit Union is a financial institution which is owned by its members and controlled by them. It aims to offer credit at reasonable rates and usually gives other financial services too.

Across the world there is a tremendous variation in how Credit Unions work. They can be small community arrangements or large institutions with large amounts of assets.

The usual definition of a Credit Union is that it should be a not for profit cooperative institution but this can vary to allow credit to finance services for members. Canada is a prime example.

A Credit Union is different from a bank by virtue of the fact that its members democratically elect a board of directors without regard to how much money any particular candidate may have invested in the union.

The volunteer board sets the union interest rates and oversees other matters. Typically a union will offer savings accounts, often called share accounts, share draft accounts, credit cards and online banking.

Credit Unions began in rural Germany and soon spread to France, Italy, the Netherlands, Austria and the United Kingdom. They are purely for individuals and in the UK began as mutual societies which grew out of the friendly society movement of the 1700s.

The first was Equitable Life and the whole movement was closely linked with the Industrial Revolution when there arose a great need to provide for poor workers. This is also where building societies began as worker cooperatives, amassing their resources to build houses locally. They would then be allocated to local workers, usually by drawing lots.

Anyone who remembers the traditional insurance collectors during a period right up to the 1980s was still part of this system which stemmed from the Industrial Revolution. In fact if your Mum paid 6d a week to The Man from The Pru that would be known as an industrial branch policy. A small sum insured for a small premium. The policy would be geared to provide a certain sum, usually after 10 or 15 years or it would be a whole of life policy payable only on death.

So simple was it to provide a policy then that for the first payment and a minimum of paperwork an industrial branch, or IB as they were known, policy could be written. The more expensive policies would fall under the term Ordinary Branch, OB, and over the last 25 years they have replaced the IB policies and the traditional insurance collector has been replaced by direct debit payments. Now before taking out any policy it is usual to have to undertake a complete financial review before an advisor recommends a suitable plan. Oh for the days of swiftness and simplicity!

The mutuality has become swallowed up by the financial system over the years, although recent financial turmoil has probably seen an increase in their popularity.

It is always important to differentiate between a Credit Union and commercial savings clubs. There is a distinct difference as was demonstrated by the collapse of the Christmas hamper club, Farepak.

Credit unions have a guaranteed compensation scheme in line with banks and building societies which covers up to the first £50,000 worth of savings for each saver.

As with everything financial we at Third Age recommend you speak to an Independent Financial Advisor before making major financial decisions. A Credit Union may well be for you though. There is something rather comforting in knowing that their principles are buried deep in the past of the Industrial Revolution and beyond!

Graham Smith for Third Age.