As you get older you start to realise that money has a big impact on your life. We all love having, spending and saving it. But if you've spent any time at a bank or on a bank's website you'll see a lot of words thrown around that they expect you to understand. We know these aren't things that are taught at school so we have put together your go-to-guide for the financial terms you need to know.
To be 'in credit' means that you are owed money. If you pay your energy bill by direct debit you may end up being in credit with your supplier. If you pay a fixed rate you're likely to find that you're 'in credit' in the summer months as you are using less energy than you're paying for.
Annual Percentage Rate is the official rate that you've borrowed money at including any associated fees.
To be 'in debit' means that you owe money. In our energy bill example you're likely to be 'in debit' during the winter months when you may be using more energy than you're paying for.
A credit score is an indication of how a typical lender would assess you. It can go up and down depending on your circumstances. A poor credit score can result in you being rejected for loans (e.g. mortgages, car finance), overdrafts and credit cards. You can improve your credit score by demonstrating that you are a responsible borrower. Some ways to do this are paying off your phone contract each month without fail, paying off your credit card balance in full, and making sure you're on the electoral roll.
Interest is the cost of using someone else's money. When you borrow money you pay interest and when you lend money you earn interest.
When you borrow money you will pay back the amount you borrow plus interest. You will agree the interest rate with the bank before you borrow the money.
When you lend money or put it in a savings account you will earn interest. This is often variable depending on the Bank of England base rate and the type of savings account you have.
Fixed interest rate
This means that the interest rate does not change for the duration of the agreement.
Variable interest rate
This means that the interest rate can change over time. It often changes in line with measures of inflation.
Annual Equivalent Rate shows what you would be paid in interest if you put your money into the account and left it there for one year.
An overdraft lets you borrow extra money through your current account, meaning if you want to spend more than what is in your account you will go into a minus figure. An overdraft is a form of debt and is repayable on demand. The charges associated with an overdraft will vary depending on who you bank with.
This is when you have an agreed limit with the bank that lets you spend a bit more than you have in your current account. When agreeing on this you'll be made aware of the interest rate and fees associated with the overdraft.
This is when you spend more than what you've arranged with your bank and exceed your existing overdraft limit. You are more likely to be charged a much higher interest rate so it's best to avoid this if possible.
A Direct Debit is a common way of paying bills. Setting up a Direct Debit means you have told you bank to pay money to a certain organisation on a regular basis. Direct Debits are controlled by the organisation you pay the money to. They can increase if, for example, your phone bill costs more this month because you exceeded or data allowance.
A standing order is similar to a Direct Debit but is controlled by you, meaning you have total control over how much the payments are and how regularly they are made.
An Individual Savings Allowance allows you to save tax free into a cash savings or investment account, meaning any interest earned will not be taxed. The government sets the amount you can save per year in an ISA. This tax year it is £20,000. You can spread the £20,000 across different ISA types if you want to.
An Instant Access Savings Account pays interest on your money and allows you to withdraw it whenever you want. There is no fixed amount on how much you can save and IASAs can often be opened with as little as £1.
Fixed-term savings accounts
This type of account lets you put your money away for a set period of time in return for a fixed amount of interest. Once your money is locked away you will not be able to access it until the term is complete. Check out our Fixed Savers.