Mastering your money – The basics•
Getting your head around the world of money can be tough. But, once you’ve got the basics down, everything gets that bit easier.
In this blog, we’ll start giving you the lowdown on banks, borrowing and credit scores.
Knowing which bank account is right for you
Most of us open a bank account when we’re kids and stick with it. But there are lots of options out there and sometimes it makes sense to switch. Here’s a quick overview of some of the more popular types of account.
Current accounts – These are the standard accounts we use for receiving, sending and spending money. But, in the last ten years, there’s been a bit of a revolution in this area, with digital-first banks offering app-based accounts that can be quicker and simpler to use.
Paid for accounts – Sometimes known as ‘packaged accounts’, these come with a subscription fee. They work like current accounts, but with a few extras thrown in, like phone insurance or car breakdown cover.
Student accounts – You guessed it, these are accounts designed specifically for students. On top of all the normal stuff, they’ll usually offer perks such as interest-free overdrafts, railcards or even cash incentives to open an account.
Joint bank accounts – These are accounts in the name of two or more people. They’re mostly opened by couples or people in shared households. They can help make paying joint expenses, like bills or rent, a bit easier.
Borrowing, credit and debt are all different ways of referring to the same thing. But whatever you want to call it, it typically works like this: A bank or lender will need to review your application for how much you want to borrow (they can say no!). If approved, you’ll usually have to repay that amount over an agreed period, plus interest. If you don’t repay what you borrow, this can have a serious impact on your finances.
How interest works
Here’s an example.
You borrow £1,000 with an interest rate of 20%
You repay it in 12 fixed instalments over a year
Your monthly repayment amount is £91.96
The amount you repay in total is £1,103.52 – that’s £103.52 in interest
Different types of borrowing
Unsecured personal loans – This is a lump sum borrowed from a bank or lender. In most cases you’ll need to repay it monthly over an agreed period with a set interest rate. The ‘unsecured’ part of the name refers to the fact you don’t have to put anything up as collateral. (See car finance below for an example of ‘secured’ debt.)
Credit cards – These are another form of unsecured debt. With a credit card, you’ll get a set ‘credit limit’ which is the amount you’re allowed to spend, and an interest rate. Each month, you’ll need to repay at least your ‘minimum payment’ amount. This is based on how much you spend, so it can change. If you repay what you’ve spent in full every month, you can avoid paying interest.
Buy Now Pay Later – Buy Now Pay Later allows you to delay paying for something, or to breakdown the cost of a purchase over a set period of time. Buy Now Pay Later is often interest-free, but it’s important to remember, it’s still a form of debt.
Car finance – This is specialist borrowing for car purchases. Like a loan, you’ll have an interest rate and a term over which the money you borrow will need to be repaid. But this type of borrowing is usually ‘secured’ – that means if you don’t keep up with repayments, the lender can take ownership of the car. You may also need to pay a deposit at the start.
Mortgages – This is borrowing to finance the purchase of property. Think car finance, but on a bigger scale. The deposit is likely going to be bigger, the time you’re repaying is going to be longer and the amount borrowed higher. Again, the debt will probably be secured, this time against the home you’re buying.
Overdrafts – An overdraft if is a way of borrowing money through your current account. If you have a £100 overdraft, it means that, even if your account balance is £0, you still have £100 available to spend. There can be charges and interest for using your overdraft and these differ depending on the account.
For more detail on borrowing, head to the Money Charity’s dedicated pageThe Money Charity’s dedicated page.
How lenders assess you
Before they can approve an application, lenders have to judge how likely you are to repay what you borrow. If you’re viewed as high risk of not repaying, you’ll get a higher interest rate, making it more expensive to borrow. Or, you may even have your application rejected. But how do lenders judge that risk?
You can get a sense of how lenders view you through your credit score – which is a rating of how likely you are to repay debt. The higher your credit score, the lower your perceived risk. Here are some of the key things which go into your score:
Your history of repaying debt – This factors in everything from phone contracts to mortgages (even Netflix can be counted!). If you’ve got a history of making repayments on time, this can improve your score. If you have little to no credit history, this can lead to a lower score.
Your ‘credit utilisation’ – This refers to how much or of your available credit you’re using. For example, if you have a credit card with a £1,000 credit limit but have only spent £100, that could be seen as ‘low utilisation’ which can be good for your credit score.
How often you apply for credit – Every time you apply for credit – even if the application is unsuccessful – what’s known as a hard search is recorded against your name. Having lots of these over a short period can harm your score.
Financial associations – If you’ve applied for joint credit or opened a joint bank account with someone else, they will become a ‘financial associate’ of yours. Their credit history can then impact your score.
Personal details – Making sure you’re registered to vote at the correct address can improve your credit score.
That’s everything for now. Keep an eye on the blog as we’ll be posting more articles to help you master your money.
The lowdown on student finance
In this special guest blog, Stephanie Fitzgerald from The Money Charity gives the lowdown on student loans.
How to start saving
The sooner you start to save, the more you benefit, growing your stash, and earning more in interest.