A recent report released by the Money Advice Service suggests that the misunderstanding of financial jargon within terms and conditions have cost consumers an average of £428 in the past year. This equates to £21 billion nationally.
This really shocks me because anyone who takes out a financial product whether it be a loan, credit card, overdraft or God forbid a payday loan, should at the minimum know what they are signing up to and what charges are being accrued.
Here at the Skint Dad blog we want to help you. We don’t want you to lose £4.28 – let alone £428 – because you don’t know your APR from your EAR and, because of this, we bring you:
Skint Dad’s Ultimate Financial Jargon Buster
This is not just a collection of everyday financial terms but things that you may have heard in passing. You’ll be unlikely to hear some of these on your bank statement but, they are known in the world of personal finance.
This could be your everyday current account where your wages go in and your bills come out. You could also have savings accounts, jam jar accounts or cash accounts to name just a few.
AER stands for Annual Equivalent Rate and basically means the interest rate on savings. The higher the rate, the better the saving.
In very basic terms, an annuity is the income that you receive from a pension.
APR means Annual Percentage Rate and it tells you how much interest you will pay when you borrow money. To get the best deal, you want the rate to be as low as possible.
APRC is Annual Percentage Rate of Charge and is one of three main figures you see when applying for a mortgage and other secured loans. For comparison, the APRC figure takes into consideration initial rates, follow on rates and other fees and costs associated with the loan.
If you are not keeping up with your payments for your mortgage, rent, council tax, utility bills, loans, credit cards, or any other bills, and you miss a payment, you will have arrears.
Assets are things that you own that have a cash value like a house, car, jewellery, savings (or even a yacht or priceless artwork for some).
Also known as an Automated Teller Machine, or Hole in the Wall, or the cash point. It’s the place to go to get cash out of your account.
Carrying out an audit of your finances should be done regularly to see if you can reduce any outgoing and streamline your budget.
Although just doing their job, a Bailiff can come to your home and seize your good to sell at auction if you have not kept payment arrangements. They must be certified to carry out this work. They are now known as Enforcement Agents.
Your balance is the amount of money in your account.
A balloon payment is a large lump sum payment made at the end of a loan. You could normally see this on car finance.
You will normally face bank charges if you go over your authorised overdraft limit, or make payments where you have no overdraft. It could also be for interest payments on an overdraft.
If you are in unmanageable debt, you can apply to the courts for bankruptcy. If this is something you are considering, it is definitely worth contacting National Debtline or StepChange for free impartial debt advice.
Benefits can cover a huge range of different entitlements including, but not limited to, income-related benefits, tax credits, contribution-based benefits, Council Tax Reduction, Carer’s Allowance or Universal Credit. Have a look at EntitledTo and see if you can get any financial support.
When you take out a loan (from the bank or even a friend) or spend money on a credit card, you borrow the money with the promise to pay it back.
A budget is your plan (whether on a spreadsheet or written on paper) for how you get the money in and how you spend it. You can to aim to at least break even at the end of your budget period (I budget monthly) or have more money left over.
After you’ve made a purchase, you are rewarded with a percentage of the spend back. This can either be via a cashback site where you click a link before buying something or as a reward each time you use certain credit cards.
County Court Judgement (CCJ)
If you have not been able to reach a payment agreement with your creditors then they may go to court and seek a CCJ or County Court Judgement against you. The court will make a decision about how you repay the debt. If you don’t make repayments they can send a court bailiff to collect the money you owe or take your goods to sell. Seek advice from Citizens Advice Bureau or any other debt charity for help.
Compound interest is not good if you owe money. At the end of each year, interest is added to the figure. The amount of interest the following year would be worked out on a bigger amount of money than was originally borrowed. You will be paying interest on top of interest.
Compound interest on savings, on the other hand, is a good thing as you will be earning interest on top of interest.
This is a loan that brings together everything else you owe into one monthly payment, instead of having lots of individuals ones. Depending on interest rates it may be better to pay loans and debts back individually.
A voucher giving you money off a purchase.
Cooling Off Period
When you sign some contracts you have a cooling off period which allows you to change your mind. Check the paperwork (BEFORE) you sign it to see your rights.
Stands for Card Protection Plan which was mis-sold to a number of people from 2005. It would have covered for things like lost and stolen cards and keys and identity protection.
When you have credit it means that you have money to spend in your account.
If you get something “on credit” it means that a company has lent you the money and you need to pay them back.
Similar to a debit card but when you spend money on a credit card you are borrowing it and will need to pay it back, usually with interest.
This will be the maximum that a lender has allowed you to borrow. You will not be able to go over the limit.
Your credit score is a calculation made by lenders to see how risky to you to lend to. Each lender uses different criteria to give you a score. They will take into account information on your credit file so it’s a good idea to make sure everything on your file is up to date and accurate.
A creditor is someone you owe money to. They could also be known as a lender.
When money is taken out of your account it is debited.
Instead of using cash, you could use a plastic card that is linked to your current account. You could either use it in a shop (in-store and online) or withdraw cash from an ATM.
The amount of money you owe is a debt.
A debt collection agency is a company who buys old outstanding debts from lenders, then chases the arrears for payments. They have no special legal powers and are not bailiffs so cannot take your belongings.
Debt Management Plan (DMP)
After checking your budget and working out priority and non-priority debts, a third party could help you to set up a Debt Management Plan and work out a payment plan with your creditors. A lot of companies will charge you a fee for this but there are a number of places that will do this for free. For any debt advice, please contact a debt charity like Step Change.
Debt Relief Order (DRO)
If you have debts of less than £15,000 and have less than £50 per month spare after you’ve paid your bills, you may be able to apply for a debt relief order. For any debt advice, please contact trained professionals who can help you like National Debtline.
If you fail to make a payment on a debt you will default.
DFW (Debt Free Wanabee)
If you are in debt, you are a Debt Free Wanabee until it’s cleared. DFW is usually a term seen in forums.
A payment set up with your bank to make regular payments for bills.
EAR means the Equivalent Annual Rate which is the interest rate you are charged if you go overdrawn on your current account.
An emergency fund is a savings fund to cover you in the event of something unplanned such as a job loss, illness or unexpected large purchase for the home.
An Enforcement Agent used to be known as a bailiff. They can come to you home and seize your good to sell at auction if you have not kept payment arrangements. They must be certified to carry out this work.
The market price of your home minus the outstanding mortgage cost is the equity.
Financial Conduct Authority (FCA)
The Financial Conduct Authority was formed on 1 April 2013 and replaced the Financial Services Authority (FSA). They regulate financial firms in the UK.
A fixed rate loan has an interest rate that will not change during the term of the loan.
If you default when paying the mortgage, the creditor can act to take ownership of the property. A foreclosure is where the lender will sell the property to recover the costs.
Being economical and not wasteful.
Full and Final Settlement
You can offer to make a lump sum payment to a creditor that is less than the overall amount owed with the agreement that the creditor will write off the rest of the debt. Your credit file will show that part payment is made, rather than the full balance, but will show as zero owed!
This is your full pay before tax and National Insurance contributions and any other deductions (such as pension or salary sacrifices) have been taken off.
A hire purchase is a credit agreement. You take an item without paying and pay back the amount borrowed in instalments. If you do not keep up the repayments, the item can be taken away. You don’t own the item until you have finished making the repayments.
An Independent Financial Advisor will offer you independent advice you on financial products for your needs. They must be authorised and regulated by the FCA.
Regular money that you receive from a job or from interest on savings.
Interest is normally shown as a percentage. For money you borrow you it is added to the amount you have to pay back.
For savings, it is given as a reward.
Interest Only Mortgage
Interest only mortgage is where you only repay the interest on the loan amount and are not paying back the loan itself.
Individual Savings Accounts allow you to save up to and pay no tax and could either be a cash ISA or a stock and shares ISA. Maximum savings limit is £15,000 (as at July 2014).
An Individual Voluntary Arrangement (IVA) is an alternative to bankruptcy. This debt repayment option gets you to repay your debt monthly but you write off part of your debt. Before making any decisions please seek support and advice from trained professionals who can help.
An account held by two or more people, each able to withdraw money.
To open a Junior Individual Savings Account (JISA) you must be under 18 and you can save up to £4,000 tax free (as at July 2014), be a UK resident and not have a Child Trust Fund (CTF).
Job Seekers Allowance (JSA) is a benefit for those who are unemployed and seeking work.
Late Payment Fee
If you do not make payments to your debts on time, your lender may charge you a late payment fee. This will appear on your credit file.
An organisation that allows you to borrow money from them.
A liability order could be granted by the magistrate’s court if you do not keep up with your council tax payments. It gives the council the power to collect outstanding money from you by a deduction from earning or bailiffs.
Is insurance that pays out a sum of money when the person who is insured dies or after a set period.
A loan is when you borrow money that has to be paid back, usually with interest.
A loan shark is someone who lends money and changes extortionately high rates of interest. In the main, they operate illegally.
Mis-selling is when you are sold a financial product that is unsuitable for you. Some examples are PPI being sold when you are unemployed but it doesn’t cover for that or CPP being sold when the banks already cover a lot of the charges.
Money is used for payment of goods and services. You can save it, invest it, or spend it.
A mortgage is an agreement between a lender the purchaser of a property.
This is a type of tax that is deducted from wages. It covers the cost of state benefits such as maternity, pensions, and employment benefits.
You have negative equity when the house you own is worth less than the amount of the outstanding mortgage.
This is the pay you receive after tax, National Insurance contributions and any other deductions (ie pension, student loan, childcare vouchers, deductions of earnings) are made.
With non-priority debts, you won’t lose your home or car if you fail to make repayments. These types of debts include credit cards, unsecured bank loans, catalogues and water arrears. You could get taken to court for non-repayment.
If you spend more money than you have in your account you will go overdrawn. You can request an overdraft in the short term from your bank which can act as a buffer but you will be charged a fee if you use it.
Pay Day Loan
They are like legal loan sharks. They are very short term, high interest, loans. Please avoid using pay day loans and seek financial support from charities like National Debtline or Step Change if you need help.
Stands for Pay As You Earn. Your employer will usually calculate your tax and National Insurance contributions and make monthly deductions.
This is an income after you retire. You could either have a state income or could save for your own pension.
PIN stands for Personal Identification Number which is the 4 digit secret number you use with your debit or credit card.
PPI is Payment Protection Insurance is sold alongside credit cards or loans to covers you if you are unable to make payments due to unemployment or sickness.
This is like a prize draw. It’s similar to saving but you don’t earn any interest. Instead, any interest made on the money is paid back to people who have premium bonds as part of a monthly prize draw. Sometime you may win, other times you don’t.
Priority debts need to be paid above all others. If you don’t pay your priority debts like your mortgage your house may be taken away. If you don’t pay your gas or electric bill your supply could be cut off and if you don’t pay council tax you could go to prison.
This is a way to calculate how much you should offer your creditors. Rather than paying them all the same amount, you would offer the highest amount to the creditor you owe the most to.
You can remortgage to switch to a better deal with your current lender or a new one. You will use the remortgage to pay off the first.
If you don’t keep up with repayments on a mortgage the lender may take the property to recover the cost of the debt.
This is what happens with a credit card. You borrow money when you buy something (up to your credit limit). Once you have paid it back you are able to spend borrow again without needing to reapply.
Rule of 72
You can use the Rule of 72 to calculate approximately how many years an investment will take to double in value. Just divide 72 by the annual interest rate to find out the number of years until it has doubled.
Money that you don’t spend and put aside for the future.
A fraudulent way that people try to get money from you.
A secured loan is a debt that is attached to something you own. If you don’t keep up with the payments it is likely it will be taken back from you to recover the debt.
If you are self employed, a partner in a business or a director you must complete an annual tax return know as a Self Assessment.
When you spend more money than you earn, you have a shortfall.
A tax that you have to pay when buying a home over a certain value.
A standing order is a regular payment that you can set up with your bank and control.
You’ll get a statement from your bank showing the money that goes in and comes out of your account each month. If you bank online, you’ll not likely get a paper version.
You can pay tax on a number of things to help fund the government. From VAT on spending to income tax which will be deducted from your monthly salary.
A tax code is used by your employer to calculate how much tax you need to pay.
You could be entitled to Working Tax Credits if you work enough hours or Child Tax Credits if you have children. Entitlement to both tax credits is calculated based on your income and personal circumstances.
If you pay too much tax, HMRC will refund you!
The tax year runs from 6 April to 5 April in the following year.
To be really careful with money and reuse resources.
This is a debt that is not secured against anything. If you don’t pay you won’t have to return any goods but you will be taken to court. As the loan is not secured the interest rates are usually higher.
Universal Credit is a single benefit that has replaced certain benefits in the UK. It can be claimed by those on a low income or if you are unemployed.
The interest rate on a loan could change over the period of time that you have the loan. It is not fixed.
When shopping online, enter a code at checkout to get a discount or special offer.
A regular payment for work you have done. You may be paid weekly, bi-weekly or monthly.
When you remove money from your account you withdraw it.
YTD is an abbreviation of year to date. It starts from 1 January and runs up until today
So there you have it – Skint Dad’s Ultimate Financial Jargon Buster!
Have we missed any? Let us know and we’ll be sure to add it. We’re missing K, Q, X and Z so if you can think of any for these it’d be brilliant.
Ricky Willis is the original Skint Dad. A money-making enthusiast, father, and husband to Naomi. He is always looking for unique ways to earn a little extra.