Financial terminology can be mind boggling but it is essential that you have an understanding of banking terms so you have an idea of what services your bank offers or what you are agreeing to on financial documents.
In this article:
What is a Debit card?
This card operates like a credit card except that the amount payable is deducted directly from your bank account. This means that no debt is accrued. Using a debit card means that you can only spend authorised funds held in your bank account. It may be safer than carrying large sums of cash around in your wallet.
What is a Credit card?
A credit card allows you to buy goods and services based on your promise to pay for these goods and services at a later date. The card issuer (usually a bank or credit union) is providing you with a line of credit up to a set limit.
Regular payments must be made but you are not normally required to pay the full balance. If you choose to pay less than the full balance you will be charged interest, thus the goods and services will cost you more than their original face value.
When used sensibly credit cards are a useful and safe way to pay for goods and services and the items you purchase on the card are protected under the Consumer Credit Act so you may be able to claim your money back if something goes wrong with your purchase. But if you are not paying the balance in full each month these have the potential to get out of control.
What is a Store card?
Similar to a credit card, in that it allows you to buy goods and services based on your promise to pay for these goods and services at a later date. The company is providing you with a line of credit up to a set limit. Sometimes you earn points or receive money off for the store (and their partners).
Regular payments must be made but you are not normally required to pay the full balance. If you choose to pay less than the full balance you will be charged interest, thus the goods and services will cost you more than their original face value. The interest on store cards are often set at a much higher rate than credit cards and overdrafts, but they often attract a discount in the shop.
What is a Credit Check?
Enquiry made on the credit history of an applicant, normally by reference to one of the major credit agencies. When you apply for credit, companies will conduct a credit check - so keep your file as clean as possible! If you would like guidance on how to check and understand your credit report, check our further advice & resources.
What is a Direct Debit?
A Direct Debit is an instruction from you to your bank or building society permitting a company to claim regular payments directly from your account. This service ensures you do not miss payments and consequently, you will avoid late payment fees.
However, you may feel you lose some control of your finances in this way and may prefer to pay bills when they arrive. If you opt to set up Direct Debits for multiple goods or services, it’s advisable to set up a way for yourself to keep track of these payments, so you know when to expect payments to be taken.
To help you manage your money, we advise reading our tips in Top tips on managing your money during your studies.
What is a Standing Order?
A regular payment for a fixed amount that you can ask the bank to make from your account to another specified account. This is a good way of paying for regular bills such as rent. You will not forget to make the payment and will therefore avoid late payment charges that may be added for missed payments.
Ensure you have sufficient funds in your account to meet these transactions. You may find it best to have these payments debit your account after your salary is paid into the bank to avoid returned items and associated fees.
Standing orders can appear very similar to Direct Debits – to understand the difference read The Money Advice Service - Direct Debits and standing orders.
What is an ‘ATM’?
ATM stands for ‘Automated Teller Machine’ and it’s a cash machine or often referred to as a ‘cash point’. It will give you money when you put your debit/credit card in but may charge an administration fee. Look out for this before withdrawing – machines that charge should say this on the home screen.
Try to avoid machines that charge for withdrawals, even if it is located in your corner shop, as the costs do add up.
What is a Basic Account?
Basic accounts must have the following features:
- Employers may pay salaries directly into them
- Government benefits may be paid directly into them
- Cheques and cash may be paid into them
- Account holders may pay bills by direct debit
- Cash may be withdrawn from cash machines
- The accounts don’t have overdrafts (but increasingly they are offered with small buffer zones of £50- £100 depending on the bank)
- All money held in the accounts may be withdrawn
These accounts offer a solution for those who may have a poor credit history or no credit history, such as international students on a student visa and EU nationals.
Many students open these accounts for the first 6 months and then move on to a standard current account with more facilities such as online and telephone banking. If you’re an international student and would like more guidance on banking in the UK, read our article Opening a UK bank account as an international student.
What is an Overdraft Facility?
This facility on a bank account allows customers to borrow up to a pre-determined limit. This limit must be agreed in advance and is subject to status. If withdrawal exceeds an authorised overdraft limit, customers face high charges.
Shop around for the lowest overdraft interest rate. Most banks offer 0% to Home students for the length of their studies with an additional period after graduation.
Important to know: Remember to look beyond these initial incentives to see the overall package being offered, and carefully check the terms for repayment. Find out more about choosing and opening bank accounts in How can I open a bank account?
What is a Default?
This a failure to meet a financial commitment, such as missing monthly loan repayments; so this is to ‘default on a payment’. Again, this will be noted on your credit file and may affect future lending decisions.
If you think you may not be able to make a payment, call the company involved for options, if an arrangement can be made, then a default could be avoided.
What is a ‘CCJ’?
A CCJ stands for ‘County Court Judgement’ and is a decision reached in the County Court which can be for not paying debts. If you pay off the debt, the CCJ is satisfied and a note is put on your records to say so.
This will stay on your credit file for 6 years and will affect decisions on your borrowing applications for at least this period. It is likely you will be declined store credit, mortgage applications and car loans with a CCJ on your file. If you are being threatened with action that may lead to a CCJ, always seek advice.
What is a Base Rate?
The interest set by the Bank of England on which other banks base their rates. Lenders usually follow it by adjusting their Standard Variable Rate. Consider the effect base rate increases may have on borrowing before signing loan agreements, which is especially important with respect to variable rate mortgages. Can you afford to continue making monthly payments if interest rates rise by 1% or more?
What is ‘APR’?
APR stands for ‘Annual percentage rate’ and is the total cost of borrowing including all costs (interest, legal, valuation, arrangement costs etc.). Be wary of interest not described as APR as this may not represent total charges associated with borrowing, there may be added arrangement or final settlement fees.
What are Early Repayment Charges?
If the loan is repaid early, you may be charged to cover administration costs. The repayment period varies depending on the terms of your loan/mortgage. This should be stated clearly on your agreement.
What is ‘HP’ or Hire Purchase?
HP stands for ‘Hire Purchase’ which is a type of credit whereby you ‘hire’ the item you are buying for a fixed period, during which time you pay for the item in monthly instalments, plus interest.
Unlike ordinary credit agreements, you do not own the goods until the final payment of the agreement is made. If you do not make regular payments, creditors can ask you to return the goods.
If you would like to find out about this type of payment and how it works, the Citizens Advice Bureau offer more detail in Hire purchase and conditional sale.
What is a Repayment Mortgage?
Also known as a ‘capital and interest’ mortgage. Your mortgage repayments are used partly to repay the mortgage amount and partly to pay the interest on the amount you borrowed. The most common type of mortgage, where unlike interest-only mortgages, the full house loan amount should be fully repaid at the end of the specified term.
You don’t have to arrange a mortgage with your own bank. We advise always shopping around for the best option.
Further advice & resources
For more guidance generally on managing your money, please refer to our articles in our Money Advice category, which covers a range of topics with advice and tips.
If you’re stuck you can always reach to the Money & Housing Advice team, or refer to some of these external websites:
Money Saving Websites