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You need an A-Level in maths to deal with everyday banking tasks, but what do day-to-day financial terms mean?

Explaining the confusing world of financial jargon

You need an A-Level in maths to deal with everyday banking tasks, according to research by Tandem Bank. In fact, more than three quarters of people don’t understand common banking terms.

When it comes to investing your hard-earned money, things get even worse. Around two thirds of people think they could be missing out on millions of pounds because they don’t understand financial jargon.

We’re not just talking about the really complex stuff either. Everyday terms like ISA, APR and Bank of England base rate are top of many people's lists of misunderstood terms.

Test your financial jargon knowledge

 

So keep on reading to find what day-to-day financial terms trip us up the most and what do they mean?

ISA

Introduced in 1999, Individual Savings Accounts (ISAs) have been one of the most popular ways for people to put money aside. The huge advantage of the ISA is all the interest you earn is tax-free.

There are now a large number of different ISAs, each with their own regulations, but with a Cash ISA you can deposit £15,240 a year. This is going up to £20,000 from April 2017.

APR and AER

There might be nothing worse than acronyms that sound the same, but apply to different things.

APR (Annual Percentage Rate) is the interest and fees from borrowing money. This is most commonly associated with credit cards.

AER (Annual Equivalent Rate) is the interest you get when saving money. It shows how much you’ll get if you leave money in an account for a year.

Base rate

We always hear about the Bank of England (BoE) base rate on the news, but we don’t understand what it means in the real world.

The base rate is what is charged for lending between banks by the BoE. This doesn’t really impact you. However, high street banks and lenders use this base rate to calculate how much interest you will pay on mortgages and other financial products. 

Balance transfer

If you owe money on a credit card which is charging you interest, you can pay off this debt by using a card offering a lower, or even zero percent interest. This is called a balance transfer.

The money you owe doesn’t disappear, it is just moved to a provider that will charge you less for having it.

Debt consolidation

People can run up debts in many different ways. Personal loans, credit cards, overdrafts, mortgage arrears and so on. This can get out of hand and rather confusing very quickly.

Debt consolidation takes all of these debts and restructures them into a single payment. Essentially you take out a loan to pay off all the debts and then repay the loan so everything is condensed into one payment. 

Fixed-rate bond

A bond is a saving product bought from banks, building societies and National Savings and Investments (NS&I), which you earn interest on.

Fixed-rate refers to the interest you will earn. When it is ‘fixed’ you get a guaranteed interest rate over a certain length of time.

Annuity

The easiest way to think of an annuity is as an income in retirement. When you retire you can use the pension pot built up over your working life to buy a financial product called an annuity.

This will then be paid to you as a regular income. However, there are a lot of different annuities and a lot depends on how much you have been able to save into your pension.

Tax code

Understanding your tax code is really important. It can be found on your payslip, PAYE Coding Notice and P45. Essentially, it is a combination of numbers and letters telling HMRC what tax you should be paying.

The reason it is important to understand it is sometimes you can be given the wrong tax code and end up paying more tax than you should. So it is worth taking a minute to check it.

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  • Nigel Payne / 16 December 2016

    I need guidance regarding what appears to be a very misleading company Aegon regarding a pension pot i have had with them since 2002.
    I needed to release sum money to pay for some building work i had done and would not have even had the work done if i had been aware of the bunch of clowns clearly stating in telephone conversations and written correspondence which has put me and my wife in financial difficulties . I have received clear correspondence from Aegon and had confirmed numerous phone conversations that i could take out a lump sum of money, so i action ed the building work and now find totally conflicting information from this company which has caused me problems with my Business A/c, my Personal A/c let alone the stress and worry caused.
    I desperately need help and the matter resolved as innocent parties are still owed money for work completed and we are noe getting overdrawn at the bank etc
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    ADMIN: You can all our advice line on 0800 138 7777 and they will try to direct you to somewhere to talk further