Jody Owen, of Walsall, West Midlands, ran down an embankment and jumped into the water to reach the car, which was almost completely submerged with two adults in the front and two children and a dog trapped on the back seat.
Ms Owen had been taking three of her own children and two others she cares for to school in her people-carrier car on 20 December, when at a junction she collided with a car that, she said, 'came out of nowhere'.
The other car disappeared from view while Ms Owen looked for a safe place to pull over. Suddenly her children started screaming and Ms Owen heard the other family calling for help. She realised the other car had slipped into the canal.
Ms Owen said, 'As soon as I understood what had happened I didn't think twice about going to help. The children stayed in the car while another witness called the police. The parents couldn't keep themselves and the children afloat, so I swam to the car and helped the mother get the children out of the water.'
The shocked family were taken to hospital along with Ms Owen for a check-up but all were unharmed. The police praised Ms Owen and have nominated her for a bravery award.
'After the accident I kept thinking that it could have been so much worse. I'm just glad everyone was fine,' she said.