The Basics
What is APR?
APR stands for "annual percentage rate" and is used to describe the true cost of the money borrowed on mortgages, loans, and credit cards
The calculation for APR takes into account the basic interest rate, when it is charged (i.e. daily, weekly, monthly or annually), all initial fees and any other costs you have to pay
As all lenders calculate APR exactly the same way, it enables you to make direct cost comparisons between lending products
What is AER?
AER is totally different - It's only used in relation to savings and interest based investments It's all about the rate of interest you'll receive on your money AER means "annual equivalent rate". It shows the true rate of interest you will have received by the end of the year taking into account the regularity of which interest is added to the account (as the payment frequency has a compounding affect on the amount of interest you receive) The AER calculation also removes the affect of any promotional offer that disappear after a few months - a popular trick used by banks and other institutions to boost their savings products to the top of the Best Buy tables
What is EAR?
EAR is the abbreviation for "equivalent annual rate"
It's used to illustrate the full percentage cost of overdrafts and any type of account that can be in credit and also go overdrawn
The calculation shows you the true cost if you use the overdraft facility
In common with the APR calculation, EAR takes account of the basic rate of interest and when the interest is charged to the account plus any additional charges
So in most respects EAR and APR achieve the same thing – it's just that APR applies to a pure lending product whereas EAR applies to a product, such as a bank current account, that can be in credit or go overdrawn
Note that the calculations for both EAR and APR always exclude any Payment Protection Insurance you've bought to ensure the monthly repayments are maintained if you are off work due to accident, sickness or unemployment
That's because this insurance is always optional and is not a condition of the lending.
Whether you're new to credit cards or already have one or two, this section will explain how they work, what you should look out for and what to do if things go wrong. This is a brief summary, but if you'd like more information, the Association for Payment Clearing Systems (APACS) has produced a guide to help you understand how credit cards work. It explains the factors you should think about when choosing one and the best ways to use your card. For more information, see the APACS website.
APACS is the UK payments association and represents all the major UK credit card issuers.
What is a credit card?
A credit card is a form of borrowing. You can apply for one from a bank, building society and certain high street stores. If they accept your application, they (your card issuer) will set you a credit limit (the amount you can borrow).
How does it work?
You can use your credit card to buy goods and services and you'll get a statement each month showing how much you've spent. You have to pay back at least the minimum amount shown on the statement each month. The card issuer will charge you interest each month on any money you still owe (the outstanding balance).
A credit card gives you the freedom to buy things now and pay later - but usually at a cost.
BACS payments
A direct transfer into your account from someone paying you (for example, your employer).
Cash (ATM) card
A plastic card that lets you get cash from your account through cash machines, at your bank or building society branch and by using cashback facilities at, for example, supermarket tills. You can also use it to make telephone or internet payments.
Cheque book
Lets you make a payment from your account to someone else.
Cheque guarantee card
Makes cheques up to the guarantee limit widely accepted, because the person you're paying is guaranteed to receive the money, whether or not you have enough in your account.
Cleared and uncleared balances
When you pay money into your account by cheque, it usually takes a few days for the cheque to clear before the money is ready for you to use. During this time, you can't be quite certain the money is yours because the cheque you've paid in might bounce - it might be worthless if the person who wrote it to you has no money in their account.
An uncleared balance includes the money in transit in your account, but your bank or building society might not let you draw it out yet. Even if it does, be careful - you could end up going overdrawn if a cheque does bounce.
A cleared balance shows only the money that has already reached your account and is ready for you to use.
You can ask a bank to clear a particular cheque more quickly than normal, but it will charge for doing this.
Credit scoring
The systems used by banks and other loan companies to judge whether you're creditworthy.
Depending on how many points you score when your personal details are run through their rating system, the financial institution will either accept or reject the risk (i.e. they will either give you a loan or turn you down).
Each institution has its own scoring system, but they also share information which is held by credit reference agencies. They will usually ask one of these agencies about you when you apply to borrow money.
Debit card
This works like an electronic cheque. When you pay by debit card, the money is automatically taken from your account.
Direct debits
Payments made on a regular basis (for example, for your gas and electricity) taken directly from your account on an agreed date. You arrange this with your supplier and give them your bank details.
Going overdrawn
If you spend more money than you have in your account, you will go overdrawn (also called being in debit or having a debit balance). Normally, you will be charged interest on the amount you are overdrawn. There could be a monthly or quarterly fee and there may be other charges too.
It's a good idea to ask your bank in advance whether you can go overdrawn, or the bank may refuse to pay your cheques, direct debits and so on and will probably charge you for bouncing these payments. The bank might write to you to tell you that you're overdrawn and charge you for the letter. Also, the interest on your overdraft is likely to be charged at a high rate.
If you ask your bank in advance to allow you to go overdrawn, you may have to pay an arrangement fee but the interest on the overdraft will be lower. And, as long as you stay within the agreed overdraft limit, you should not have to pay other charges.
Going overdrawn without permission on a regular basis could affect your credit rating.
Loans
A bank loan is a set amount of money which the bank has agreed to lend you for a set period of time. Payments and interest rates are agreed at the time of the loan.
Personal overdrafts
Some banks offer an overdraft facility on a current account. There are two types of overdrafts: authorised and unauthorised.
You can arrange an authorised overdraft with your bank for you to use at any time.
An unauthorised overdraft is when you go overdrawn without the bank's permission. If you don't have sufficient funds in your account, the bank could bounce cheques, direct debits and other payments you want to make. This could also result in expensive charges.
Unauthorised overdrafts often incur a higher interest rate and other charges. Going into overdraft without permission on a regular basis could affect your credit rating or access to credit.
Standing orders
You can arrange for a payment to someone to be made direct from your account on a regular basis (for example, to pay bills or a regular allowance to a student son or daughter). You arrange this with the bank.
Variable interest rate
Interest rates offered by banks and financial institutions on loans or deposits which are liable to change according to circumstances. For example, a movement in the interest base rate set by the Bank of England would usually be an influence.
What is a mortgage?
A mortgage is like any other kind of loan – you borrow money, and you pay it back with interest over a period of time. But it has one key difference: it’s secured against your home. So if for any reason you can’t repay it, the lender can sell your home to recover their money.
Buy-to-let mortgages
Although the FSA regulate the way the majority of mortgages are sold, in most cases they don't regulate buy-to-let mortgages. This means you may have less protection if things go wrong with a buy-to-let mortgage. Buying a property to let is a long-term investment which you hope will generate an income from rents and a capital gain when you sell the property. There is no guarantee that you'll make a profit on your investment.