Learning Aim A Flashcards
(114 cards)
1
Q
4 functions of money
A
Unit of account
Means of exchange
Store of value
Legal tender
2
Q
Unit of account
A
• It allows us to place a monetary value on goods and services.
• The price of goods and services show the unit of account
3
Q
Means of exchange
A
• It allows us to trade.
• Businesses and customers can buy and sell goods and services using money
4
Q
Store of value
A
• It allows us to use it in the future as it keeps its value.
• You might have money saved in a bank account
5
Q
Legal tender
A
• It is a legaly recognised form of payment.
• Money is widely recognised and used for all sorts of transactions from buying an icecream or getting a haircut to paying a deposit on a house and receiving your wages.
6
Q
Role of money
A
Personal attitudes
Life stages
Culture
Life events
External influences
Interest rates
7
Q
Why is planning your expenditure important?
A
Avoids debt
Cost control
Avoids bankruptcy
Stick to a good credit rating
8
Q
Different ways to pay
A
Cash
Debit card
Credit card
Cheque
Electronic transfer
Direct debit
Standing order
Prepaid card
Contactless card
Charge card
Store card
Mobile banking
BACS
CHAPS
9
Q
Cash
A
Notes and coins in a wide range of denominations
10
Q
Advantages of using cash
A
Most widely accepted form of exchange
Physical not virtual
Consumers feel confident when using
Makes budgeting easier
11
Q
Disadvantages of using cash
A
Can be lost or stolen
Threat of counterfeit
Only really appropriate on purchases up to a certain amount
Cannot be used online
12
Q
Debit card
A
Issued by banks with payments for goods and services being deducted directly from a current account
13
Q
Advantages of using debit cards
A
No need to carry cash
Secure method of payment with low risk of theft
Widely accepted
Offers a degree of protection on purchases
Suitable for online transactions
14
Q
Disadvantages of using debit cards
A
Short time lapse between makingthe transaction and the money being withdrawn from the customer’s account may result in overspending
Not accepted or appropriate for small transactions
15
Q
Credit cards
A
Issued by financial institutions allowing customers to delay payments for goods and services
16
Q
Advantages of using credit cards
A
Allows a period of credit that is interest free, e.g. one month
Most cards are widely accepted
Loyalty schemes are often offered, e.g. collect points or cash back
Offers a degree of protection on purchases
Suitable for online transactions
17
Q
Disadvantages of using credit cards
A
Interest is charged on balances not paid off within a month
Can encourage a customer to overspend and get into debt
Interest is charged on cash withdrawals
A limit will be set on the amount of credit allowed
18
Q
Cheques
A
A written order to a bank to make a payment for a specific amount of money from one person’s account to another account
19
Q
Advantages of using cheques
A
Low risk form of payment as the cheque can only be cashed by the named payee
Widely accepted for face-to- face and postal transactions
No need to provide change as can be written for an exact amount
20
Q
Disadvantages of using cheques
A
Expensive for the consumer if the bank refuses to clear the cheque, i.e. it ‘bounces’
The time delay between writing the cheque and it being cashed could cause a consumer to go overdrawn
Viewed as old fashioned
Easy for the consumer to make errors when writing the cheque which will create problems for both the consumer and the recipient
21
Q
Electronic transfer
A
Payment is transferred directly from one bank account to another
22
Q
Advantages of electronic transfer
A
Almost instantaneous
Provides a record of payment
No additional costs incurred
Easy to use for one-off and more frequent transactions
23
Q
Disadvantages of electronic transfer
A
Risk of loss if the transfer is incorrectly set up
Not appropriate for face-to-face transactions
24
Q
Direct debit
A
An agreement made with a bank allowing a third party
to withdraw money from an account on a set day to pay for goods or services received, e.g. pay a gas bill
25
Advantages of direct debit
An easy way to make regular payments, e.g. utility bills
Amount paid can vary to ensure the payment matches the amount required by the vendor
Quick and easy to set up
26
Disadvantages of direct debit
If the payer makes a mistake and takes too much it is the payee’s responsibility to claim back the money
The payer determines the amount paid each time making it difficult for the payee to plan and budget
27
Standing order
An agreement made with a bank to transfer a fixed sum of money to a third party account on a set date on a regular basis, e.g. pay £30 for a phone contract each month
28
Advantages of a standing order
The same amount is paid each time making it easier for the payee to plan and budget
Easy both to set up and to cancel
No need to remember to make regular, standard payments
29
Disadvantages of standing order
Payments are taken regardless of the customer’s balance which could lead to the unplanned use of an overdraft facility
Payments will continue to be made unless cancelled
30
Pre paid card
Money is uploaded onto a card with transactions then being withdrawn to reduce the balance
31
Advantages of pre paid card
Can set a budget in advance to avoid overspending
If lost or stolen the loss is limited to the remaining balance
An effective way of controlling the amount spent by children and where money is spent, e.g. upload money for school lunches or transport
32
Disadvantages of pre paid card
No protection if lost
Sometimes requires an initial fee to purchase or set up the card, e.g. Oyster
33
Contactless card
Cards containing antennae allow money to be transferred when the card touches a contactless terminal
34
Advantages of contactless card
Gaining in popularity
Secure method of making payments
35
Disadvantages of contactless card
Often only accepted for relatively small transactions
Still not widely accepted as seen as new
36
Charge card
Issued by financial institutions allowing customers to delay payments for goods and services for a short period of time; the balance must be paid off in full when a statement is issued
37
Advantages of a charge card
Reduces risk of running up debts
Allows a short period of credit
Avoids the need to carry cash
Often offers additional perks
38
Disadvantages of a charge card
Must be paid in full each month
Often an annual fixed fee is applied
39
Store card
Issued by a retail outlet so that customers can delay payments for goods and services (similar to a credit card but only accepted by stores specified)
40
Advantages of a store card
Allows a short period of credit that is interest free, e.g. one month
Often offer loyalty schemes, discounts and special promotions or privileges
41
Disadvantages of a store card
Only accepted in issuing store or linked associations
Interest is paid on outstanding balances
Can encourage overspending and result in a consumer getting into debt – particularly if they hold multiple cards
42
Banker’s Automated Clearing Service (BACS)
A system that allows the transfer of payments directly from one bank account to another
43
Advantages of a BACS
Can be accessed in a number of ways including in a branch, over the telephone and online
No additional costs
44
Disadvantages of BACS
Faster payment is not offered by all banks or branches and the customer may therefore have to default to BACs which can take three days to transfer payments
A limit is set on the amount that can be transferred in any single transaction
45
Clearing house automated payment system
A system that allows the transfer of payments directly from one bank account to another
46
Advantages of CHAPS
Transfers can be made the same day assuming instructions are received prior to a set time, e.g. 2 pm at Barclays
There is no limit on the amount that can be transferred in a single transaction
47
Disadvantages of CHAPS
Normally, there is a fixed charge per transaction regardless of the amount transferred
48
4 types of current accounts
Standard
Packaged premium
Basic
Student
49
Standard current account
This is the normal account offered to customers with a reasonable credit rating.
It includes standard features such as the ability to pay and withdraw money, cheque book, debit card, interest payments on positive balances and a pre-agreed over draft limit
50
Advantages of standard accounts
No charges on credit balances
Offers the holder a wide range of facilities including a cheque book, debit/cash card and possibly an overdraft facility
Convenient for receiving regular payments,
51
Disadvantages of standard current account
Potentially high charges on the use of an overdraft facility
Standard features only, i.e. no additional perks
52
Packaged premium current account
This account offers additional features to a standard account, for example car and house insurance, credit card protection, breakdown cover and cash back on certain transactions. The bank may have additional charges for these accounts so it is important that you check whether you are being offered a good deal or not.
53
Advantages of a packaged premium account
No charges on credit balances
Offers the holder a wide range of
facilities including a cheque book, debit/cash card and possibly an overdraft facility
Convenient for receiving regular payments, e.g. wages and making regular withdrawals
Offers the holder additional perks at a packaged price cheaper than acquiring them individually (standard additional features include things such as holiday/travel insurance, break down cover and phone protection)
54
Disadvantages of packaged premium accounts
Additional monthly charge is frequently applied
The package offered may not offer value for money or meet the
needs of the individual account holder
55
Basic current accounts
This account offers only limited features designed for those customers who may otherwise find it difficult to open a bank account due to poor credit ratings. A basic account will not offer an overdraft and will not pay interest on positive balances.
56
Advantages of a basic current account
Available to customers with a low credit rating
Offers an easy first step for individuals to gain access to basic
banking facilities
57
Disadvantages of a basic current account
Limited facilities, e.g. no debit card or overdraft facility
58
Student current accounts
This account is designed specifically to meet the needs of learners. Common features include an agreed overdraft limit and incentives to join the bank, for example free rail cards or cash. Banks are keen to attract learners because once a young person has joined a bank they tend to stay with that bank for life. However, this is less often the case now due to the availability of information on the Internet and the ease with which banks can be changed.
59
Advantages of student current accounts
Course fees and student loans can be easily handled
Bonuses offered are designed to meet the needs of learners, e.g.
discounts on travel or small lump sum cash payment
60
Disadvantages of student current accounts
Overdraft facilities could encourage overspending
Charges for overspending are high Limited facilities
61
Types of borrowing
Overdraft
Personal loan
Hire purchase
Mortgage
Credit card
Payday loan
62
Overdraft
This allows you to withdraw money that you do not have from a current account.
It may be suitable to meet short term needs, for example a shortage of cash just before payday.
63
Advantages of an overdraft
Interest is charged only on the amount outstanding
Can be paid off without penalties
An overdraft facility can be prearranged and only used if needed
Provides a short term solution to cash flow problems
64
Disadvantages of overdrafts
When used, interest charges are often high
Additional penalty charges for going over a pre- arranged limit are often very high
Not the cheapest form of borrowing
The ease with which these can be obtained could encourage overspending
65
Personal loans
This gives you the ability to borrow a set amount of money, normally for a
specific purpose, to be repaid in regular instalments with interest.
It may be suitable to fund the purchase of a high price item such as a car or to
make home improvements.
66
Advantages of personal loans
Regular, pre-agreed payments make planning and budgeting easy
As a general rule these would only be issued to individuals who can prove their ability to make the repayments
Useful when looking to purchase a specific item of medium to high value, e.g. a car or home improvement
67
Disadvantages of personal loans
May have to be secured against an asset which means if payments are missed the asset may be taken to cover the outstanding debt
Not really suitable for short term loans
68
Hire purchase
This allows you to have use of an item immediately but pay for it in regular
instalments. The item remains the property of the seller until all instalments have been made.
69
Advantages of hire purchase
Spreads the cost of an expensive item over a period of time
Credit is secured against a specific item
Often allows a customer to afford something now that they could not otherwise afford,
70
Disadvantages of hire purchase
Interest charges may be higher than other traditional loans
Ownership of the asset may legally be kept by the seller until the final payment is made
Agreements can be manipulated to make a purchase seem deceptively appealing
71
Mortgages
This is a long-term loan to fund the purchase of assets, normally paid back over a long time, for example 25 years. It is secured against an item, for example a
house.
72
Advantages of mortgages
Allows the customer to spread the cost of expensive items over a long period of time, e.g. the purchase of a house is often spread over 25 years
Interest rates, depending upon the mortgage deal, can sometimes be fixed or tracked against a standard rate of interest reducing the risk of fluctuations
73
Disadvantages of mortgages
Interest payments, although sometimes fixed for a short period of time, can vary
Failure to meet repayments may lead to a loss of a home and seriously affect an individual’s future credit rating
Penalties may be applied to early repayment
74
Credit cards
Goods are paid for by card and can be paid for either at the end of a set period, normally a month, when a statement is issued or over time with the card provider stating a minimum payment each month. The minimum payment will be a percentage of the balance on the credit card.
75
Advantages of credit cards
The credit card holder can pay above the minimum rate if they wish and hence speed up the rate of repayment and reduce interest incurred
Can be used for items of multiple sizes and value, to a limit, without the need to secure against an asset
Provides some protection on purchases
76
Disadvantages of credit cards
Can encourage overspending, sometimes on unnecessary purchases, and can lead to debt problems
Interest rates are often higher than on a personal loan
77
Pay day loans
This is a short term source of finance used to bridge the gap between now and
next receiving a wage.
It will normally only available for relatively small amounts at very high rates.
78
Advantages of payday loans
Help solve immediate short term cash flow problems
Relatively easy to secure
79
Disadvantages of pay day loans
Interest rates are very high and the cumulative amount to be repaid can quickly spiral out of control
80
Types of saving and investment
ISA
Deposit and saving account
Premium bonds
Bonds and guilts
Shares
81
ISA
This is a type of saving account where the holder is not charged income
tax on the interest received.
82
Advantages of an ISA
Tax is not charged on interest earned allowing the saver to keep all of the rewards for saving
Interest rates are sometimes slightly higher than in alternative savings accounts
83
Disadvantages of an ISA
Notice is often required to make withdrawals and according to the agreement there may be a limit set on the number of withdrawals made
If the saver makes more withdrawals than set out in the agreement then the penalty may cancel out the tax savings
There is a limit set on the annual amount that can be placed in an ISA
84
Deposit and savings account
These are accounts where interest is paid on the balance and normally the holder needs to give notice before withdrawing funds.
85
Advantages of Deposit and savings account
Interest is earned on positive balances
Accounts sometimes require regular deposits of a set amount forcing the saver to follow a savings plan
86
Disadvantages of a deposit and savings account
Interest earned is taxed
The percentage rate of interest paid on savings is likely to be lower than interest to be paid on borrowing, therefore the benefits of savings are lost if the customer is borrowing at the same time
87
Premium bonds
A government sheme that allows individuals to save up to a set amount by buying bonds. The bond holder does not receive interest on their savings but each bond is placed into a regular draw for cash prizes.
88
Advantages of premium bonds
Chance of winning substantially more than could be earned in interest
Can be easily withdrawn with no loss or penalty
89
Disadvantages of premium bonds
No guaranteed return on investment
Maximum amount reviewed annually by the government
The amount invested, assuming zero or low returns, loses value due to inflation
90
Bonds and guilts
These are fixed term securities where the lender (the individual) lends money to companies and governments in return for interest payments. The money is invested for a specified period of time.
91
Advantages of bonds and guilts
Regular fixed returns
Spreads risk across a range of markets
92
Disadvantages of bonds and guilts
Risk of losing some or all of the value of the investment if the bond or guilt value falls
Interest payments may not be received if the issuer is unable to make payments
93
Shares
Shares involve investment in a business in return for equity, i.e. the shareholder becomes a part owner of the business. The shareholder will receive dividends from the company’s profits and will also want the value of the shares to increase.
94
Advantages of shares
Share prices fluctuate offering a potential high reward
Shareholders’ returns can include dividend payments and an increase in share value
As part owners in a business there may be additional benefits including discounts and special offers
For some investors share ownership is more than just a way of saving – it is a pastime and creates interest
95
Disadvantages of shares
Share prices fluctuate offering a potential high risk
There is no guarantee of any reward or return as all of an investment can be lost
96
Types of insurance
Car
Home and contents
Life
Travel
Pet
Health
97
Car insurance
It is a legal requirement to insure any car that is on the road – this covers theft as well as accidents.
The degree of cover will vary depending upon whether the policy is third party or fully comprehensive
It protects the driver, passengers and other road users.
98
Advantages of car insurance
Meets legal requirements
Protects self against theft or damage
Protects against damage caused to a third party
99
Disadvantages of car insurance
Premiums can be high depending upon assessed level of risk, e.g. expensive for young drivers
Normally there is an excess that must be
paid, e.g. first £500 of all damages is still the responsibility of the car owner
100
Home and contents insurance
Home insurance covers the physical building, for example against fire.
Contents insurance covers the physical items in the house including electrical
equipment, furniture and personal items. If there are individual items of high value, for example a diamond ring, then they may need to be specified on the policy
Items can be insured when a person is using them away from home as well as when inside the house.
101
Advantages of home and contents
Protects against damage which may otherwise be too expensive to repair resulting in the loss of a home
Contents are protected both when inside the house and outside
102
Disadvantages of home and contents
Premiums are an additional expense to home ownership
Some items cannot be replaced due to a value beyond the financial worth, e.g. a painting or inherited piece of jewellery
103
Life insurance
Life assurance is an ongoing policy to pay a lump sum upon death.
Life insurance is a policy for a set period of time to pay a lump sum if you die
within that time period.
Mortgage lenders often insist upon life insurance for the same period as the
mortgage to secure repayment of the mortgage if the holder dies while monies are still owed.
104
Advantages of life insurance
Provides peace of mind to family following the bereavement of a homeowner
105
Disadvantages of life insurance
If the policy holder does not die within the period of life insurance no payment is made (could be seen as an advantage!)
106
Travel insurance
This protects individuals or groups while abroad. Policies can be purchased to
cover a specific trip, multiple trips or for all trips within a year.
Cover will generally include loss or theft of property, illness, cancellation and
emergencies up to predetermined limits.
Specific types of holiday or activities, for example skiing or extreme sports, will
require additional cover due to the high level of risk associated.
107
Advantages of travel insurance
Provides protection for personal belongings when away from home
Covers medical costs when on holiday
Protects against cancellation and sometimes delays
108
Disadvantages of travel insurance
The person suffering the loss is likely to have to pay upfront to replace items or cover medical costs and then reclaim later
An additional cost when travelling abroad
109
Pet insurance
This protects the owners of pets against some or all of the expenses associated with treating ill or injured pets, i.e. vets’ fees.
110
Advantages of pet insurance
Avoids expensive vet fees
If vet fees are too high, there may be no alternative to having the pet put down – insurance can avoid this
111
Disadvantages of pet insurance
An additional monthly expense to protect against the unexpected
112
Health insurance
This covers individuals, families or employees against medical expenses including assessments, treatments and loss of earnings.
In the UK the National Health Service provides free medical care but individuals may wish to take out insurance to receive payments if, for example, time is spent in hospital, or to receive private treatment.
Health insurance can include payment plans to cover routine visits such as to the dentist or optician with a percentage of expenses paid.
113
Advantages of health insurance
Some compensation is provided when ill which can reduce the financial burden and stress allowing the patient to concentrate on recovery rather than financial worries
If used to fund private care, this often results in quicker treatment and better facilities
114
Disadvantages of health insurance
Paying for something that you hope you will not use
Premiums can be expensive depending upon the degree of cover required
Will not cover pre-known conditions
