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Interest rates 101: Financial crash course for students

Wednesday, 17 February 2016

Posted by Kelly Emmerton

So it’s time to put away childish things and step into the real world. No more mac ‘n’ cheese for breakfast, lunch and dinner (ramen is cheaper). Say goodbye to Saturday morning cartoons (and hello to Looney Tunes reruns at 2 a.m.). Gone are the days of cutesy kids savings accounts named after koalas (if you have any money, it’s probably under the couch somewhere).

You are now an Adult.

And adults do things like compare interest rates on their new loan, credit card or savings account. Eugh.

Interest rates may seem innocuous and unimposing, like your roommate's new friend Kevin, but they are very important to understanding how just about every major money decision you’ll make works. And, like Kevin, if you don’t pay them the attention you should, you might find your TV, laptop and collection of illegally downloaded Game of Thrones seasons missing and your life in shambles. (We’ve got a bone to pick with Kevin.)

What are interest rates?

If you’re asking this, you are obviously at the caveman level of your personal finances. But that’s ok, because you’re not alone and we have an entire page dedicated to answering that question right here.
The Cliff Notes version is, if you borrow money, you’re charged interest for it. If you save money, you earn interest. The interest rate is how much interest you’ll be charged/earn.

Interest rates for money you have

So you’ve been eating 2 minute noodles, sneaking into movie theatres and showing up to stranger’s parties to drink free beer for months now. You’ve probably got at least a modest cash stash to show for it, right?

Don’t let all that skimping and tight-assery go to waste. Here’s what you’re looking for in a place to park your hard earned funds.

Bank account

This is the perfect place for all your disposable funds. Well, maybe they’re not disposable per say, but it’s the money you use for day to day activities, like burgers and coffee.
Bank accounts or everyday transaction accounts are great because you have instant access to your money, usually through a bank or debit card. But the downside is that you’re earning measly interest, if any.
So you can read up on the best kinds of bank accounts for students and then head over to our comparison page and find yourself one. But to make the most of your moolah, link your transaction account with a high interest savings account and park any funds you won’t need straight away in it.

Savings accounts

Here’s where the magic really happens. You’ll earn way more interest in even a pretty basic savings account than you would in your bank account. And with Mozo on your side, you can kiss basic goodbye and enjoy the best savings accounts around.

And once you have an excellent savings account, here’s what you’re looking for to make it worthwhile:

Great introductory rate
This is the equivalent of interest rates pre-drinks. It gives you a bit of a boost before the main event, but you’ve got to keep in mind that it can’t last forever. In fact, an introductory rate will usually last anywhere from 3-12 months. It’s a great way to maximise your savings and there’s nothing you need to do except open the account.
Awesome bonus rates
If you can play by the rules, you can keep that high interest rate for longer with a high bonus rates. Usually you have to meet criteria like a minimum monthly deposit. Have your wages deposited into the account and you should be home free.
High ongoing rates
When your introductory or bonus rate is over, your interest rate will revert back to a lower ongoing rate. Spare yourself an interest rates hangover by making sure that this ongoing rate is competitive. You don’t want to wake up in bed with a 0.01% interest rate.
Extra bits
Aside from interest rates, there’s a whole heap of things like fees, deposit requirements, and withdrawal conditions to contend with. Check out our guide on students savings accounts for more info.

How to do it:

Get online

Let’s be honest, you were online anyway. But why not use the internet for something more constructive than cat videos for a change? Online savings accounts often come with high interest rates and low or no fees, because there’s no brick and mortar bank to support. They’re also easy and accessible.
Extra bonus: next time you get caught procrastinating instead of writing that business management essay, you can just say you're managing your personal finances instead.

Sleep around
Hop into bed with every attractive interest rate you see. Just not at the same time. Take advantage of high introductory interest rates and then dump them like your ex-boyfriend Chad. If you’ve got the time and patience to switch accounts regularly, you can keep a high interest rate for years. And with heaps of online banks out there, it’s easier than ever to be unfaithful to your savings account.

...And for money you don’t.

So, here’s the thing… you don’t actually have any money. Or, well, you do, but you’ve also got textbooks to buy, an Opal card to top up, rent to pay, three 21st birthdays coming up and hey, you gotta eat. After all that, your financial worth usually hovers precariously around the $2.30 mark until payday.

You’ve got a few options here and none of them involving selling body parts on the black market.

Option 1: A credit card.

The ultimate symbol of adulthood and financial independence: your very own credit card. The awesome power to spend well above your means can be exciting, but it's also a very bad idea to let yourself get sucked in.

Credit cards work more or less like a loan, except you can keep using more and more money. It sounds like a good thing, until you find yourself in Kanye levels of debt. The key to avoiding that sorry fate is understanding how credit card interest works. We’ve written an entire guide about it, but here are the highlights:

Purchase rate - This is the interest you’ll be charged on all the shiny new things you buy. It’s probably the interest rate you saw advertised and you’re looking for the lowest one you can find. Except that the lower the purchase rate, the higher the credit card fees are likely to be. This is the moment to make an Adult decision, and weigh up the fees against the low interest rate.

Cash advance rate - So you’re favourite Indian place is cash only but you forgot to go to the ATM earlier and all you’ve got on you is your credit card. The smart thing to do here is to go without your Chicken Tikka Masala tonight (or con a friend into buying it for you). If you withdraw cash on your credit card, you’re going to get hit with whopping interest, often around 20%. We love Indian food too, but it’s really just not worth it. 

Interest free days - Have we terrified you enough? Well here’s the saving grace of your new credit card: interest free days. With most credit cards, you’ll have around 44 or 55 days to pay off your balance before you’re charged interest on it. If you keep clearing your balance within this timeframe, you can use your credit card interest free for pretty much as long as you want. Here are the rules you’ve got to look out for to make this work:

  • First off, interest free days don’t apply to cash advances. So, sorry, but your Chicken Tikka is still off limits.
  • When we say pay off your balance, we mean the whole balance, not just the minimum repayment. If you get into the habit of only making the minimum repayment, you’ll likely end up racking up some serious debt.
  • If you don’t pay off the balance in full, you’ll not only be charged interest but you’ll lose your interest free days for the next month as well. It’s like failing an assignment you didn’t even hand in yet.
  • The interest free period starts at the beginning of your statement cycle, not when you make the purchase. That means, if you have a 44 day interest free period, but you buy next semester's textbooks 20 days into your billing cycle, you’ll actually only have 22 interest free days.

Can I get a Credit Card?

Credit cards are not for everyone, and if you’re really giving off that poor student vibe, it’s likely to make some providers a bit iffy. To secure a flashy piece of plastic, you’ll need:
  • to be over 18
  • a reliable source of income (and care packages from Nan don’t count)
  • sometimes you’ll also need to meet a minimum income requirement (usually $15,000-25,000)
  • a good credit rating and history
Depending on what card you’re after, there might be more requirements as well.

So there you have it! If you stick to the rules of your credit card, it can be a good way to keep yourself fed until payday. But remember to keep an eye on that interest because it can really come back to bite you.

Option 2: A personal loan.

If you can’t trust yourself with plastic, another option for getting your hands on some dosh is a personal loan. This is really a strategy reserved for big ticket items - you take out a personal loan to fund backpacking in India, not to buy your Chicken Tikka (at this rate, you’ll never get it).

There are heaps of different types of personal loans that might work for you, and you can read all about them here.
One of the main choices you’ll have to make is whether you want a secured or unsecured loan with a variable, or fixed interest rate. Here’s what all that means:

Secured Unsecured
For this, you have to own something more valuable than your ancient macbook so you can put it up as collateral. Usually it’s something like a house or a car - if you don’t have either, you can talk to your parents about using theirs.
The reason you put up an asset is that it will get you a lower interest rate and save you money.
If your parents say no (which may be a good call. Are you going to gamble your childhood home against your ability to be fiscally responsible?) you can still take out a loan, but it will mean higher fees and interest.
Fixed interest Variable Interest
Just what it says on the tin: when you take out a loan the interest rate will be fixed at a certain value and won’t change over the life of your loan. This is good because it protects you from rate rises and makes it easier to budget (which we know is your top priority). The downside is that fixed rate loans are more likely to incur fees if you happen to pay them back early. Is the opposite of fixed. Your interest rate will fluctuate according to the market. While the advertised rate will often be less than the fixed rate version, if interest rates rise during your loan term, it could end up costing you more in the long run.

Generally speaking, you’re likely to get a better interest rate on a personal loan than a credit card, but of course, you’re an Adult, and it’s up to you which one you opt for.

Still, the power isn’t all in your hands - just like a credit card, you’ll have to meet some criteria before banks will trust you enough to lend you a load of cash. You’ll have to:
  • be over 18
  • have a regular income
  • with some lenders you’ll need to make at least $25,000 p.a.
  • be wanting to borrow more than $1,000

What now?

Congratulations! You’ve now graduated Interest Rates 101 with honours. Go and grab that Chicken Tikka to celebrate and then check out our student hub for more info on any of the above. Or, if you’re ready to get started, head over to the student comparison page to find yourself the best deal on credit cards, personal loans, savings or bank accounts.

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