With more technical terms than a physics textbook, the world of banking can be difficult to navigate. Use this guide to brush up on your vocab and be fazed no more.
The older you get, the more you think it – maths lessons at school should really teach you about banking.
One day you’re at school, with mum and dad taking care of all things money. The next you’re at uni, and all of a sudden you’re expected to manage your finances despite never having being taught about any of it.
We have a ton of advice on banking and finance, but if you don’t know the lingo, it can be a little tricky to understand. Use this page as your go-to guide for all the financial terms you should need as a student!
Basic financial terms explained
Before we dive into the really meaty stuff, let’s check that we know what the basic terms mean. We’ll be using some of these later on to describe the more complicated phrases, so it’s worth making sure that you’ve got a good grounding!
What is a current account?
A current account is a one-stop-shop for managing your day-to-day finances. Most people will just refer to it as their bank account, and it’s usually where your student loan or salary will go.
What is interest?
Interest is a percentage of a sum of money that is then added onto it over time.
When you borrow money from a lender, there’s a good chance that you will have to repay it with interest. You can effectively think of it as a way to thank the lender for giving you the money and allowing you to repay it in instalments.
Similarly, when you put your money into a savings account, you’ll gain interest on top of it. This time the tables have turned, and you can see this as the bank’s way of saying ‘thank you’ for using their services.
What is compound interest?
Whether you’re borrowing or saving, you’ll probably come across the phrase ‘compound interest’. As opposed to normal interest (which is just based on a percentage of the original sum of money), compound interest also accounts for the money added on by previous instalments of interest.
Compound interest is probably best explained using an example, so let’s give it a crack.
Imagine you had £1,000 and added 5% interest – you’d now have £1,050.
Fast forward to the next time interest is added, and rather than just gaining 5% on the original amount (£50), you’ll also be earning 5% on the £50 of interest added last time (£2.50). This means that the amount of interest added will increase with each instalment.
In a nutshell, this is the principle of compound interest: adding a percentage of a percentage.
What is an overdraft?
A student’s best friend An overdraft is like a buffer attached to your current account, giving you some money just in case you ever use up all of your own.
You may be charged a fee or interest (or both) by your bank for entering your overdraft. It’s therefore important that you keep on top of your finances and don’t go too far into your overdraft.
Student bank accounts often come with an interest-free overdraft, which (as the name suggests) allows you to use a certain amount of your overdraft without paying interest. The overdraft may also be fee-free, meaning you won’t have to pay a fee for using it.
The final key aspect of overdrafts is that they can be split into two sections:
What is credit?
What is debit?
To be ‘in debit’ means that you owe money. Again, you might see this on a bill if you’ve not paid it yet – they could describe your account as being in debit to the value of £70, meaning that you need to pay them £70.
What’s the difference between credit and debit cards?
A credit card is essentially an agreed way of borrowing money on a consistent basis. That’s not to say you don’t have your own money to spend – it just means that you’re delaying the point at which you’re using your money.
Sadly you will have to pay back the money you’ve spent on a credit card, with interest often added on too.
If you ever want to get rid of a credit card, you can cancel them fairly easily. But remember, you’ll need to pay off any outstanding debt on the card before you’re completely shot of it!
More complex financial terms explained
What is a direct debit?
If you’ve ever been responsible for paying for your own phone contract, you’ll have probably had a direct debit. In fact, most regular bills can be paid for in this way.
Setting up a direct debit means that you’ve told your bank to pay money to a certain organisation on a regular basis (often a specific day each month). The amount may be the same each time, but it can change when appropriate (we’ve all had to pay the price for exceeding our data allowance).
Direct debits are controlled by the organisation that you’re paying the money to. They set it up, and they control how much and how often you pay them. This is just one of the many reasons to regularly check your bank statement, just to make sure you’ve not been over-charged.
What is a standing order?
Standing orders are very similar to direct debits, but with a couple of key differences. Firstly, unlike direct debits (which are controlled by the recipient), a standing order is controlled by you. You set it up, and you control how much and how regularly the payments are made.
The other important difference is that a standing order will always be for the same amount of money. You can elect to change the amount, but this will be a permanent change – if you want to transfer a different figure each month, a standing order probably isn’t for you.
Rent payments are a perfect example of when a standing order should be used. Rent is usually paid in equal instalments every week or month, and usually on the same day.
What is a credit rating?
Put simply, your credit rating (also referred to as a ‘credit score’) decides how generous a lender will be when they give you money.
It will affect how much they lend you (if at all) as well as how much interest you’ll pay, so it’s super important to try and keep your credit rating as high as possible.
What is a guarantor?
When you borrow money from a lender, or sign a contract to make regular payments (like when you agree to rent a property), you’ll usually be asked to provide a guarantor.
A guarantor is essentially your safety net – a person themselves available should you find yourself unable to make the necessary payments.
As the guarantor is expected to make payments for you when you can’t, they will need to be financially secure themselves – or at the very least, have a good credit score.
What is an ISA?
Acronyms are everywhere in finance, and this is one of the biggies. An ISA (individual savings allowance) is a savings account that allows you to store money without having to pay tax on the interest gained.
The tax-free nature of ISAs is why they were historically a very popular way to save larger sums of money. However, in 2016 the law changed to allow a significant proportion of the population to save money in a normal savings account without paying tax on the interest.
The most complicated financial terms explained
Ok, we’ll admit it – these aren’t the most complicated financial terms out there. But they are the most complicated ones that you’ll need to worry about as a student.
Before we start, just as a warning, we’ll be looking at AER, APR and EAR. These all look pretty similar – they’re all acronyms, and they’ve all got an A and an R in them. What’s more, they are pretty similar. But they do refer to different things, so it’s worth getting your head around what they mean.
What are fixed and variable interest rates?
When you borrow or save money, you’ll be told whether or not it’s subject to a fixed or variable rate of interest.
Fixed rate interest doesn’t change for the duration of the agreement – be that the repayment period or the time in which you keep your money in a savings account.
Variable rate interest means that the interest rate can (and probably will) change over time – often in line with measures of inflation, like RPI (Retail Price Index).
What is RPI?
RPI stands for Retail Price Index, and is a measure of inflation.
RPI tracks changes in the price of a set ‘basket’ of items that consumers regularly buy. Some things, like milk and bread, will always in the ‘basket’, whereas other things, like gin, will come and go based on popularity. Over time, the changes in the prices of the items in the ‘basket’ are used to determine the rate at which inflation is occurring.
Ordinarily, you wouldn’t need to worry too much about RPI – but as we said above, your Student Loan accumulates interest at a rate that can be influenced by RPI.
What is AER?
AER stands for Annual Equivalent Rate – the official rate of interest for a savings account. This represents how much interest would be paid over the course of a year, and allows an easy comparison between multiple accounts (particularly as different accounts may pay interest at varying intervals).
Interest on a savings account may also be advertised as a gross rate. The specific differences between gross and AER aren’t really worth understanding, but the jist is that AER takes into account compound interest, whereas gross doesn’t.
When the interest on an account is paid annually, the gross rate and AER should be the same, because there’s no compound interest. If the interest is paid monthly, AER will be slightly higher than the gross rate as it accounts for the interest gained on the existing interest (e.g. 5% gained on the initial amount, plus 5% on the 5% that was gained last month).
The only thing you need to remember is that you should never compare AER with gross rates. AER and gross rates are different things, so you should only ever compare AER with AER, and gross with gross.
What is APR?
APR stands for Annual Percentage Rate. This refers to official rate at which you’ve borrowed money including any associated fees, essentially giving a complete picture of how much the debt will cost.
It’s important to remember that APR does not necessarily equal the interest rate, as it also includes fees. For example, if you borrowed money at 11% APR you could have an interest rate of 9%, plus additional charges which are the equivalent of an extra 2%.
This seems complicated, but it allows a fair comparison between lenders (otherwise they could advertise a low interest rate, but chuck loads of additional fees on top to make it more expensive than another loan with higher interest rates).