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Financial literacy cheat sheet: supercharge your banking knowledge

Wednesday, 21 June 2017

Posted by Kelly Emmerton

<p>Financial literacy cheat sheet: supercharge your banking knowledge</p>

How would you fare on a financial exam? If you’re like most Aussies, probably a lot worse than you think. 

Online bank ME recently found that while only 13% of Aussies rate their money know-how as “below average” a massive 60% of us would fail a quiz testing basic financial literacy. Yikes!

We could probably all stand to brush up on our money management skills, so we’ve put together a cheat sheet explaining some of the personal finance concepts that tripped people up:

Comparison rate

According to ME’s survey, 74% of Aussies didn’t know what a comparison rate is. Here’s the deal: the comparison rate takes into account the interest rate and fees that you’ll be charged when borrowing money, to give you the “true” cost of a loan. By comparing loans using the comparison rate, it’s easier for you to get a clear, fair idea of which loan is better value. 

Read more about the comparison rate.

Low rate personal loans

Speaking of borrowing money, 58% of Aussies didn’t understand why a personal loan might be a better option than a home loan or credit card. Personal loans give borrowers access to a chunk of funds which are paid back over a set term through monthly repayments. Unlike a credit card, this means debt is unlikely to mount up to an uncontrollable amount. Plus, Mozo’s database shows that Aussies with an excellent credit score can snag a personal loan with rates as low as 4.47%.

Minimum credit card repayments

As mentioned above, a huge portion of Aussie shoppers didn’t realise just how big of an impact a lingering credit card bill is having on their wallets. The minimum credit card repayment that you need to make is usually either a dollar figure or a percentage of your balance, whichever is higher. 

So say you put a $2,000 spend on your plastic and the minimum repayments are either $25, or 2% of your balance. You’ll need to pay the 2%, since that’s higher than $25 and you’ll still pay interest on the remaining $1,960 balance. So even though you technically don’t have to, it’s much better to clear your entire balance every month.

Wondering how long it will take you to pay off that niggling credit card debt? Use our credit card debt calculator to work it out.

Government deposit guarantee

61% of people surveyed were under the impression they’d lose their money if their bank went bust. Luckily, we can confirm that this isn’t so, thanks to the government guarantee on deposits. Basically, if you’ve got up to $250,000 in an Authorised Deposit-taking Institution (such as a bank, credit union or building society) then this money is insured by the government, and you’ll get it back if your bank goes under.

You can read more on ASIC’s Moneysmart website.

Compound interest

Everyone knows the benefit of having a rainy day fund, but 42% didn’t understand compound interest and how it can help you plump up your savings stash. In short, compounding interest means you earn interest on top of interest. 

So, say you had $1,000 in a savings account and earned 2% p.a. interest on it. That’s $20 in interest, for a balance of $1,020. You would then earn interest on that entire balance, not just your original $1,000, meaning your money will grow faster.

Check out our guide for a full rundown of how to calculate compound interest.

Extra loan repayments

More than a third of Aussies didn’t know that they could pay less interest by reducing the length of a loan. There are two ways to do this: the first is to choose a shorter loan term. For example, on a loan of $15,000 at 5.17% interest, you would pay a total of $2,910 in interest over a 7 year term. Choosing a 3 year term reduces that to $1,226. Just keep in mind, this strategy means making higher monthly repayments - so crunch the numbers first and make sure your budget can handle it.

The other option is to make extra repayments on your loan whenever you have spare funds. But first, be sure to check that this is a feature your loan offers, and that you won’t be charged a fee for doing it. Another thing to look out for is an exit fee for completely paying off your loan early.

Want to learn more about terms that will help you understand your home loan? Check out our dedicated guide.

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