Flashcards in Unit 1 : Financial Capability for the Immediate and Short Term Deck (500):
Anything that is widely accepted as a means of making payments.
What does money refer to?
Coins, notes, electronic balances held in bank accounts.
What was used before money was created?
People used a system of barter to trade goods or services.
Give 5 limitations of using a barter system.
- It relies on a 'double coincidence of wants'.
- It relies on the two parties agreeing a rate of exchange.
- Items cannot be divided to give change.
- Many items are not very portable.
- Deciding the intrinsic value of an item.
Give 7 means of payment that are not money.
- Traveller's cheques
- Oyster cards
- Debit and credit cards
- Contactless cards
- Charge cards
- Store cards
Give a example of a modern barter system.
Local exchange trading systems or schemes (LETS). A local network that enables people to exchange goods and services with each other without using money. E.G. Babysitting.
Give the 8 features of money.
- Acceptability (have fiduciary value)
- Stability (hold its value)
- Divisibility (into smaller units, to combine to make any amount)
- Durability (lasts, hardwearing)
- Portability (to carry around)
- Scarcity (or value will be lost)
- Homogeneity (identical)
Give the 4 functions of money.
- Means of exchange
- Store of value
- A means of borrowing and then repaying the debt
- Unit of account
Define 'purchasing power'.
The quantity of goods and services that money can buy.
What is a key consideration for savers with regard to the money saved?
That inflation can reduce the purchasing power of money saved over time.
What are young people receiving an allowance likely to do with their money?
Spend most of it.
What are young people adults likely to do with their money?
Those who have just left home and are earning a low wage are likely to spend most of their money on living expenses.
What are adults likely to do with their money?
They may spend money on living expenses and fun items, or borrow money through a mortgage.
What are parents likely to do with their money?
They may borrow to buy a car, but spend most of their income on living expenses.
What are middle aged people likely to do with their money?
They are most likely to pay off their debts, and save for their old age.
What are retired people likely to do with their money?
They are more likely to be spending all of their income which will have fallen since their years in employment.
What is the age group for birth and infant hood?
What is the age group for childhood (preschool)?
What is the age group for childhood (school)?
What is the age group for teenager?
What is the age group for young adult?
What is the age group for mature adult?
What is the age group for middle age?
What is the age group for late middle age?
What is the age group for old age?
What 8 things do people have different of at each stage of the life cycle?
- Life events
- Levels of income
- Levels and patterns of spending
- Amounts of savings and attitudes towards savings
- Amounts of debt held and attitudes to debt
- Family sizes and structures
- Levels of education
- Attitudes to risk (and to the future)
For what reasons do people spend money?
- To pay for essential items they need
- To pay for optional items they want now
- To save money for items they aspire to buy in the future
What can influence individuals life events?
Where they live in the world, influencing events such as ending full time education
What is the school leaving age in England?
What is the school leaving age in Scotland?
What is the school leaving age in Bangladesh?
What is the school leaving age in India?
What can change life events?
- Unforeseen circumstances
What are the 4 categories of risk?
- Physical risk (e.g. hazardous sports)
- Emotional risk (e.g. trust)
- Risk to reputation (e.g. borrowing and not paying back)
- Financial risk (e.g. investing in shares that fall in value)
Give 4 consequences of external influences on life events.
- Retirement life stage
- Migration and employment opportunities
- Lifelong learning and changes in employment patterns
- Changes to the family unit
By what criteria do we measure each method of making payments?
- Convenience for the payer
- How acceptable
What is the need to make payments called?
The 'transaction need'
What will the choice made on people's payment method be determined by?
The payment methods available to them and the one they perceive to be most advantageous
When does cash tend to be used as a payment method?
For everyday, low-value transactions when they are in face-to-face situations with the sellers
Give 5 advantages of using cash.
- Convenient for the payer (providing they have it)
- Readily accepted by sellers
- Low risk at low values
- Helps people budget
Give 5 disadvantages of using cash.
- When the transaction is not made face-to-face (i.e. using the internet), cash cannot be used
- The transaction must be made on the same or similar dates every month (e.g. paying bills)
- Paying by cash is less convenient than other methods, perhaps because of the location of the seller
- Carrying large amounts of cash can be risky
- Some sellers prefer other payment methods (e.g. energy providers often give discounts to those paying electronically)
Give 5 reasons why some sellers prefer not to be paid in cash.
- They have to look after it until it can be deposited in a bank account
- It could be stolen
- They have to process it, count it, bundle it and take it to the bank
- Employ security services to transport the cash
- Sellers can be suspicious of customers who pay for high-value items in cash, suspecting they have obtained the cash illegally (this can be an unfair assumption, though, as people without a current account have no choice but to pay in cash)
What is the term for official authorisation or instruction to transfer money electronically?
What are the 7 types of electronic payment?
- Standing order
- Direct debits
- Online banking
- Faster payments
- CHAPS (Clearing House Automated Payment System)
- Mobile banking
What is a standing order?
These are instructions to pay the same amount to another account on a regular basis.
How can standing orders be cancelled?
By giving instructions to the current account provider in writing, over the phone or online.
What is a direct debit?
Another type of automatic payment that can be set up from a current account. When people set up direct debits, they are giving permission to their provider to pay the regular bills that an organisation will present for payment - so they can be for different amounts each month.
What 3 features are included in a direct debit guarantee?
- 10 days' notice must be given of amount that is being debited and the date
- If an error is made, you are entitled to a full and immediate refund
- You can cancel a direct debit at any time
What does online banking enable account holders to do?
Give instructions for account transactions via the internet, including:
- Setting up standing orders
- Setting up direct debits
- Making one off payments to organisations or individuals
How can one access online banking?
An account holder must first register, setting up passwords and pass numbers that one can use to prove who one is. The provider usually encourages you to download security software to stop fraudsters.
Who offers faster payments?
All UK banks and building societies
What was the name of the old transfer system?
BACS, that could take up to 3 business days to transfer money electronically
What does the Faster Payments Service ensure?
That the payment arrives within 2 hours
Does the Faster Payments Service have a maximum limit?
Many providers set a maximum limit that can be transferred, such as £10,000, although a few allow up to £100,000
What is CHAPS?
A same day automated payment system used for high value payments - where funds need to be secure and guaranteed
What is the most common payment that uses CHAPS?
A house purchase
Does the CHAPS system charge?
You are often charged for this service
What is PayPal?
An online payment service that enables people to pay each other without exchanging current account details
Why is PayPal a very safe way of paying online?
Because sellers never see the buyer's personal financial details. Also, PayPal protects users from any unauthorised payments made from their PayPal account.
Give 4 advantages of electronic payments.
- Fast, safe and convenient
- Most are free of charge
- Automated payments can be set up as recurring transactions
- There are a range of different electronic payments to meet different customer needs
Give 2 disadvantages of electronic payments.
- Security issues - online fraud and identity theft mean account holders need to be very careful to follow security procedures
- Account holders make mistakes - e.g. enter the wrong amount
What is a cheque?
A payment mechanism that enables an account holder to instruct their provider to pay a specific amount of money to a specific person or organisation
What are cheques useful for?
Paying family, friends and school payments
What is clearing?
When you pay a cheque in or pay with a cheque, it takes 3 days for the funds to clear into your account, or if you have paid, 3 days for the money to leave your account
Give 2 advantages of using cheques.
- Secure way to pay money - the money can only be paid to the person names on the cheque
- Easy to carry and use
Give 2 disadvantages of using cheques.
- People or organisations accepting cheques cannot be certain when they will receive the money, due to clearing
- Cheques can bounce - in these circumstances the provider marks the cheque as unpaid and send it back to the person who was expecting the payment. This is usually as the person making the payment does not have enough money in their account to make the payment.
When was the cheque guarantee scheme withdrawn?
30th June 2001
How did the cheque guarantee work?
Providers offered a cheque guarantee card that ensured cheques up to a specific value (£50, £100, £250) would be paid, even if the payer did not have enough money in their account
Why do some businesses (including many large retailers) refuse to accept cheques?
Because of the risks that cheques will be returned 'unpaid' and because the cost of processing cheques is far greater than the costs of processing payment card transactions
What have the disadvantages of cheques and the advantages of other methods lead to?
The UK Payments Council announced in 2009 that cheques would be phased out in 2018
Why was the decision to phase out cheques reversed?
There were a lot of complaints as certain groups like the elderly and small businesses still wanted to use them
What is a banker's draft?
They look similar to cheques and are processed through the clearing system. However, they are signed by the provider, rather than the individual - this means the payment is guaranteed. You will be charged.
When do banker's drafts tend to be used?
For paying large sums of money when a personal cheque is not appropriate, e.g. buying a new car
Why would a banker's draft be used for buying a new car?
If you paid by cheque, you would not be able to drive the car away until the cheque had cleared
What are cash cards?
These allow account holders to withdraw cash from their account at a branch or using an ATM
When can cash cards not be used?
To pay sellers in face-to-face situations, over the internet or by telephone
Who is normally offered cash cards?
People under 18 and those on low incomes, so they can easily access their money
What are cash cards branded with?
Visa or MasterCard, these 2 payment systems operate computer networks that enable payments to be taken from cardholders' accounts
What are debit cards?
These allow account holders to access cash from their accounts and also pay for goods in stores, over the internet, by telephone or by post. They work like electronic cheques, but payment is made immediately.
What are debit cards branded with?
Visa or MasterCard
What happens if the PIN works and funds are available on a debit card?
Authorisation is given, meaning the seller is guaranteed to receive payment
What do sellers have to do after encouraging customers to pay by debit cards?
They have to pay their bank a small fee
What do many large retailers also offer to customers paying by card?
Cash back, where customers add cash to their bill and get the cash
Why are retailers happy to give cash back?
As the transaction is fully authorised
How do pre-payment cards work?
Cardholders load the card with money and then use it to pay for goods and services
What is the most commonly used example of a pre-payment card?
Which cards have a contactless payment facility?
Some debit and prepaid cards
Up to what amount can you pay with a contactless card?
What 4 ways can you pay with when abroad?
- Cash in the local currency
- A debit card (may be charged)
- A pre-paid travel card (similar to Oyster, withdrawals available)
- Travellers' cheque
What happens if a pre-paid travel card is lost or stolen?
The card can be blocked and the remaining balance refunded
What is a travellers' cheque?
These are pre-printed cheques for set amounts of currency, such as 50, 100 or 500 US dollars
What do you need to do when buying travellers' cheques?
Photographic ID, and to sign each cheque
What do you need to do when using travellers' cheques?
You have to sign each one, and the seller will make sure that the 2 signatures match
What can travellers' cheques be used for?
To pay in shops or hotels, or exchanged for local currency at banks
What does the choice of payment method usually depend on?
- How convenient the payer finds different methods
- Which methods the seller accepts
- How quickly the transaction can be completed
- How safe the method is perceived to be
What do most adults use current accounts for?
Their everyday banking needs, such as receiving payments, storing money for short periods of time, making payments and accessing cash
Why are some current accounts only available to those over 18?
Because they include overdrafts
Why do young people often use a savings account for everyday banking?
Because their main requirements are to store money and withdraw cash
What are the 6 types of current account?
- Standard bank accounts offering debit card and cheque book
- Packaged accounts, which charge a fee for offering additional services such as travel insurance
- Basic bank accounts which offer a cash card only and no overdraft or cheque book
- Student accounts
- Youth accounts (for people under 18)
- Premium accounts (for wealthy customers)
What is the most common type of current account?
Standard - accounts for 67%
For what percentage of current accounts do packaged accounts represent?
For what percentage of current accounts do basic accounts represent?
For what percentage of current accounts do student accounts represent?
For what percentage of current accounts do youth accounts represent?
For what percentage of current accounts do premium accounts represent?
Where are current accounts available from?
Banks, building societies and the Post Office, as well as retailers such as M&S
Which type of people does the basic bank account suit?
People who wish to avoid borrowing, such as those living on benefits or low incomes or people who have not held a current account before
What does a basic bank account not offer?
A debit card, an overdraft or a cheque book
What are people with a basic bank account given?
A cash card or pre-paid cards - these are cards loaded with funds from the account that can be used to make purchases; anywhere the card brand is accepted
What services do basic bank accounts offer?
Direct Debits and Standing Orders to pay bills, but won't be paid if there aren't any funds in the account
What is the most popular basic account?
The Post Office Card Account
When were basic bank accounts introduced?
In 2004, as part of the Government's plans for financial inclusion
Who are youth accounts available for?
People aged less than 18 years old
What do youth accounts not offer?
Overdraft facilities, because people need to be 18 to enter into a contract to borrow money
What can people aged 16-19 have with a youth account?
Cash cards, debit cards, standing orders, direct debits, chequebook, online banking, mobile banking and text alerts
What can people aged 11-15 have with a youth account?
A cash card only
When do most people open their first current account?
When they start work and tend to use savings accounts before that
What facilities do standard current accounts offer?
Facilities such as receiving payments, cash cards, debit cards, standing orders, direct debits, chequebook, online banking, mobile banking, text alerts. They are usually free of charge, unless you have an overdraft.
What are the key features of student accounts?
Low interest or no-interest overdraft facility and incentives such as discounts on contents or travel insurance policies
Why do providers want to attract students?
As some will be the high earners of the future
When would interest charges on a credit balance be much higher?
If you go overdrawn
Who are joint accounts suitable for?
People who share finances
What will the provider need to know for a joint account?
Who can withdraw funds from a joint current account and whether a signature is required from more than one of the account holders to make a withdrawal
Who is responsible if a joint account becomes overdrawn?
All account holders are responsible for repaying the full amount
What do packaged accounts offer account holders?
Extra benefits for a monthly fee (e.g. mobile phone insurance, car breakdown cover)
Why are packaged accounts not suitable for everyone?
It is important that you weigh up the benefits against the costs of the yearly fee. If the cost of the annual fee is less than the extra benefits would cost, then the account is worthwhile.
Give an example of an additional service that is offered by premier accounts?
A personal banker to help account holders manage their finances and banking products
What must you have to open a premier account?
A certain level of income
What must you present when opening an account?
You must supply the provider with proof of their identity and address - these must be separate documents and cannot be used for both
Give examples of documents that are often accepted by providers as proof of identity or a UK address.
- Gas, elec, water or phone bill less than 3 months old
- Current passport
- Insurance certificate issues in the last 3 months
- Council tax bill issues within the current financial year
- Employers ID card
- Mail order statement that is less than 3 months old
- Driving license
- Pension or Social Security book
- Medical card
- Birth certificate
- Letter from school, college, uni
Why might a provider refuse to open an account?
Because they may think the account may not be profitable - they may then suggest an alternative account
From where can you obtain statements?
ATMs, online, on paper, checking mobile app
Why is it important to write details of the payee on your chequebook?
So you know when the money has been paid, as cheques will usually appear on a statement as the number of the cheque
What is the cost of switching and closing accounts?
Providers offer a free service for switching between accounts - although you would be expected to pay fees and any other money you owe
What are the factors to consider when choosing a savings product?
- Interest rate?
- Rate of return higher than inflation?
- Tax on interest?
- How often can you withdraw?
- How often can you pay money in?
- Operating the account?
- How safe is the money?
What is the return on savings?
The interest the provider pays the account holder
What is the return on savings expressed as?
AER (Annual Equivalent Rate)
What is AER?
The interest that will be earned on the saved money in one year and takes into account how often the provider pays the interest and fees and charges
What should you compare when comparing the return on savings?
AERs, gross figures (before income tax) or net figures (after income tax)
What is AER influenced by?
The Bank of England's Bank rate, and the other rates offered by other providers
What is the Bank of England's Base Rate at the moment, and how does this affect peoples' willingness to save?
0.5%, their willingness to save has gone down
What other factors are going to influence the rate of return?
- The amount of money saved
- How long the money is saved
- Whether the account is 'online only'
- The tax status of the account (SLN)
- Introductory bonuses
- The number of withdrawals the saver makes
What are instant access accounts?
Where you can withdraw money at any time, with no charge, and will offer a much lower rate of interest
What are notice accounts?
Where the saver has to give notice, to advise the provider a set amount of time before withdrawing money - so the saver will receive higher interest than instant access accounts. However, failure to give notice usually results in the loss of interest earned during the notice period, e.g. 90 days.
What are fixed period accounts?
These usually pay interest for a fixed period of time, but the providers usually only allow limited withdrawals
What are fixed period accounts also known as?
How is the interest rate on online only accounts different?
These usually pay higher interest, as there are lower admin costs
How can introductory bonuses affect rate of return?
You can be misled if there is an introductory bonus interest rate, as it will boost the return in the first year, so subsequent years may be much lower than competitors
How can the number of withdrawals the saver is able to make influence the rate of interest earned?
An instant access account will have lower interest rate, while restricted access will have a higher interest rate
The general rise in the average price of goods and services
What does inflation affect?
The purchasing power of money
What do you need if you are going to save?
For the AER to be at least equal to the inflation rate
Does the saver benefit or lose out if AER > inflation rate?
The real value of savings increases, as the purchasing power is increasing
Does the saver benefit or lose out if AER < inflation rate?
The real value of savings decreases as the purchasing power is decreasing
Who is tasked with managing inflation?
The Bank of England
What is the government's inflation target?
2%, +/- 1
How is inflation measured?
- Consumer Price Index (CPI)
- Retail Price Index (RPI)
How many goods and services are included in the CPI basket of goods?
How do the CPI and RPI measure inflation?
By calculating the average change in prices of a basket of goods (that reflects consumer spending preferences) over a 12-month period
What is the interest on most savings accounts subject to?
Basic income tax (20% in March 2013)
Who pays the basic income tax?
The provider pays this tax direct to Her Majesty's Revenue and Customs (HMRC) and pays the saver the remaining 80% of the interest due
What is the payment of tax by providers called?
Deducting the tax at source
What will the AER of taxed interest savings account be quoted as?
Gross AER (before tax) rate and a net (after tax) rate per annum or per year
What are ISA's?
Individual Savings Accounts (ISAs) have interest paid free of tax - they were introduced by the government in 1999 to encourage people to save
When did the name of ISAs change to NISAs (new ISAs)?
1st July 2014
What are the ISA limits for 2014/15?
£15,000 can be placed in cash or £15,000 in shares, or a combination of cash and shares
How many NISAs can savers contribute to in a tax year?
What is an instant access NISA?
You can pay in up to the limit and you can withdraw throughout the year, but you cannot pay any more funds into the account
How are junior ISAs different?
These are designed for under 18s, with a deposit limit of £4,000 (in 2014/15). Interest is also paid tax-free; the Junior ISA replaced the child trust fund.
What is the Financial Services Compensation Scheme (FSCS)?
This will guarantee up to £85,000 of savings in UK banks, building societies or credit unions that are authorised by the Financial Conduct Authority (FCA) - this means that if the provider cannot repay the savings, the FSCS will repay 100% of what is owed (up to £85,000) per person per provider
What is National Savings and Investments (NS&I)?
This is for people who want 100% of their savings guaranteed, regardless of the amount. They can save with NS&I, which is backed by Her Majesty's Treasury.
What are the 3 main methods of borrowing for the immediate and short term?
- Credit cards
- Personal loans
Which firms provide overdrafts, credit cards and personal loans?
Banks, building societies and credit unions
What is meant by unsecured borrowing products?
The provider does not have rights over any of the borrower's goods if the borrower cannot repay the debt, however providers can go to court to reclaim outstanding debt
Give an example of informal borrowing.
Being lent money by friends or family
What is meant by formal borrowing?
Where an agreement is made with a bank, building society or credit union
Why do you need to be 18 to borrow from a provider?
Under UK law, people need to be at least 18 years old to enter into a credit agreement and the terms and conditions of this agreement must be provided to the borrower in writing
What 4 things does the borrower need to consider when borrowing money?
- What they can afford to repay
- The costs and risks of different borrowing methods
- How long they need to borrow for
- How they apply for and manage the debt
What 3 things does the provider need to consider when lending money?
- Type of borrowing
- Personal finance circumstances of the borrower
- Credit history
What do people who take out credit cards or personal loans have?
A 14 day cooling off period when they can change their minds, cancel the agreement and return the card or loan without penalties
What is the cost of borrowing?
The interest rate and the fees that providers charge borrowers
What must providers quote the cost of borrowing as?
An annual percentage rate (APR) for credit card borrowing and personal loans - on all adverts for borrowing products
What is APR?
APR is a standard measure that includes the interest rate and certain charges to show the true cost of borrowing for customers
What is the usual APR for a personal loan?
The APR will usually be fixed for the full period of the borrowing product
What APR does a credit card have?
Variable APRs, so the provider can raise or lower the rate
What do providers set their APRs in relation to?
The bank base rate, the risk of the customer not repaying the loan and what other providers charge
What are overdraft costs presented as?
An interest only, which is an equivalent annual rate (EAR) - the charges and fees are listed separately
Why are overdraft costs presented as EAR?
Because providers charge different fees depending on whether or not they had agreed to offer an overdraft to the customer before the customer borrowed the money
What is the difference between APR and EAR?
- The APR includes the interest rate and certain charges to show the true cost of borrowing for customers, whereas EAR is presented as interest only
- Also, all EARs are variable, they can vary over time
What is an overdraft?
A facility that allows a current account holder to withdraw more money than they actually have in their account
Who are overdrafts designed for?
Current account holders to use for just a few days or weeks at a time
What does overdraft borrowing enable the account holder to do?
Bridge the time difference between making a payment and receiving enough income to cover it
How much can the cost of an authorised overdraft vary?
From 0 around 19.94% EAR up to the agreed limit
What do providers usually alter EARs in line with?
Changes in the Bank rate - the overdraft costs are calculated on a daily basis
Why is the fact that overdraft costs are calculated on a daily basis an advantage for account holders?
As they only pay interest on the amount they have borrowed that day and for the number of days they are overdrawn
Give 4 examples of overdraft fees.
- Authorised overdraft usage fee (a fixed, one-off fee such as £10 and/or a fee per day)
- Unauthorised overdraft usage fee (a fixed, one-off fee such as £20 and/or a fee per day, which would be higher than that of an authorised overdraft)
- Unpaid transaction fee (providers can return transactions such as cheques, standing orders and direct debits to the payee's band unpaid and charge a fee per item)
- Paid transaction fee (providers must honour certain transactions, such as debit card payments, even though the account has insufficient funds to cover them)
What is the most significant difference between authorised and unauthorised overdrafts?
You can incur significant costs if you use an unauthorised overdraft, so they are much more expensive
Give 3 ways that you could avoid unauthorised overdraft costs.
- Set up text alerts to warn when the account balance is below a set amount
- Check your account balance regularly, e.g. online
- Agree an authorised overdraft
- Choose a basic bank account that doesn't have overdraft facilities, so it is not possible to go overdrawn
What is another concern as well as the cost of unauthorised borrowing?
That people who regularly borrow by overdraft may find it difficult to repay the debt
What do people use credit cards for?
To borrow a transaction amount from their credit card provider, instead of using their own funds
Give 3 providers that offer credit cards.
Banks, building societies and finance companies
What is the name given to sellers that accept credit cards?
What are the main brands for credit cards?
Visa and MasterCard
Which 4 parties are involved when people pay using a credit card?
- The cardholder
- The merchant
- The merchant's bank (called the acquirer)
- The cardholder's bank (called the issuer)
What is the use of authorisation?
Merchants must get the issuer's permission to accept transactions on a payment card above a certain value, known as the merchant's floor limit
What does CVV stand for?
Card Verification Value - to identify the person as holding the genuine card
What are 2 advantages of credit cards?
- Some people use credit cards as a way of delaying payment for a few weeks or spreading the cost over a number of months
- The credit card issuer does not charge interest for the period of time between making the card transaction and the payment due date. Depending on when the next statement is due, a cardholder can have an interest-free period of up to 56 days.
What is the Consumer Credit Act?
Gives protection for goods and services valued between £100 and £30,000 which are paid in full or part on a credit card (e.g. if items are faulty cardholders can claim money back from the credit card provider)
When is the Consumer Credit Act particularly useful?
If the merchant has gone out of business or refuses to deal with a complaint
What can you do if goods are under £100?
Approach the card issuer for help, as it may be possible to get a refund
What are the costs of using a credit card?
The APR on the amount borrowed plus any fees that apply
When someone applies for a credit card, what does the issuer offer?
They offer the individual a specific APR and credit limit based on their personal financial circumstances
What does the APR quoted in adverts being representative mean?
51% of applicants must be likely to receive it, and is also based on applicants being offered a certain credit limit and on their past borrowing and repayment history
What could the APR being variable mean?
It may change in line with Bank rate and the issuer's assessment of the risk that the cardholder may not repay
When are APRs usually calculated?
On a daily basis on the account balance
What is the APR for purchases?
What is the APR for balance transfers?
What is the APR for cash withdrawals?
When is the interest charged for a cash withdrawal?
As soon as you take the money out
What are 4 other credit card charges?
- Annual subscription fees for holding the account
- Late repayment fees
- Over-credit limit fees
- Cash advance fee (cash withdrawals)
What is payment allocation?
The cost of borrowing on a credit card depends on the order in which the card issuer uses repayments to pay off transactions and fees
What can make a big difference to the overall cost of credit card fees?
Some providers allocate payments to the most expensive debt first but others allocate payments in the order that the debts were incurred
What does how long the APR is charged on transactions depend on?
How much cardholders choose to repay when they receive their credit card statement
What do statements always give?
A minimum amount that must be paid by the due date
What is the minimum amount that must be paid by the due date often between?
3% and 5% of the total balance or a set minimum such as £5 or £25
What are the 8 different types of credit card?
- Low APR cards
- 0% introductory APR and handling fee on balance transfers
- Cashback cards
- Reward cards
- Charity donation cards
- First credit cards
- Credit cards with low cost for foreign transactions
- Gold, Platinum and Black credit cards
Who are low APR cards usually available to?
People on high incomes and/or a good repayment history - e.g. an APR of 7%
How does 0% introductory APR and handling fee on balance transfers work?
Customers who have a large balance can transfer the amount they owe from one credit card to another one, usually with a different provider. The new card issuer pays the customers debt with the old card issuer. The balance is transferred to the new card and there is 0% interest for a period of time (6, 12, 18 months). This makes the debt easier to repay because it is not increasing.
What are cashback cards?
These cards give the cardholder back a percentage of all transactions made on the card as cash. The cash reward is usually credited to the account once a year and is deducted from the amount the cardholder owes.
What is the cashback rate on cashback cards?
Usually about 2%, but these cards often come with an annual fee (£12)
How do charity credit cards work?
People can use these to donate to a particular charity. These will give an amount when the account is opened, and approx. 2% of any money spent on the card, to the charity. Both parties benefit the partnership.
What are charity credit cards called and why?
Affinity cards, as they have the provider's logo and the logo of the charity on the card as well
What are the features of a first credit card?
APR is high and credit limits are low
What do issuers often charge for each transaction on a card if you regularly go abroad?
Who are gold, platinum and black credit cards offered to?
People on very high incomes - they have high credit limits
What are store credit cards?
Some retailers offer credit cards that can only be used in their own stores; these are branded with the stores name only and are not part of the Visa or MasterCard payment systems. The APRs on these cards tend to be higher.
What are charge credit cards?
Credit cards that must be repaid in full every month. As people cannot borrow money beyond the interest-free period, charge cards do not charge interest. Issuers do charge fees, however, such as service fees, cash advance fees and annual fees.
Why do the APRs on credit cards tend to be higher than those charged on a loan?
Lending money through a credit card is more risky for a provider than lending through a loan as it is possible for cardholders to spend more on credit cards than they can repay
Why do people take out personal loans?
To be able to pay for expensive items now and spread the cost of the repayment over a long period of time
What is the APR for a personal loan?
It is fixed for the term and determined by the borrower's ability to repay
What do the statements sent by loan providers to borrowers show?
The repayments made to date and the outstanding balance on the loan at least once a year
What are the 4 features of personal loans to borrowers?
- Borrow a fixed amount of money
- Fixed period of time
- Fixed APR
- Fixed repayments made every month, easier to budget
Why are personal loans more straightforward than borrowing by overdraft or credit card?
Because the repayments are a set amount each month
What do overdrafts and credit cards offer borrowers that personal loans do not?
When people apply to borrow money, what do providers check?
Their credit history - their record of borrowing and repaying money
Who are credit history references checked with?
Agencies such as Experian, Equifax and Callcredit
What do agencies such as Experian, Equifax and Callcredit record?
What individuals have borrowed over the last 6 years and how often they were late making payments. They also record defaults, county court judgements (CCJs) made against an individual for non-payment of debts, and bankruptcies.
What do providers use credit history information for?
To decide whether or not to lend money to someone who has applied for a borrowing product and what terms - the APR, EAR, credit limit and repayment term
What do people with poor credit histories usually find?
A provider will lend them money but they will usually have to pay more for the product
What 6 factors should people consider when choosing borrowing products?
- How much they wish to borrow
- What they can afford to repay
- How often they can repay
- What the different borrowing options are
- What the cost of the different borrowing options are
- What the consequences of borrowing are
What are the 5 main providers of short and medium term financial service products?
- Building societies
- Post Office
- National Savings and Investments (NS&I)
- Credit Unions
How do financial service providers make money?
By charging fees, such as overdraft fees and their interest rate margin
What is the interest rate margin?
The difference between the interest rate charged on borrowing (APR and EAR) and the interest paid on savings (AER)
What 3 things should people consider when choosing a financial services provider?
- The advantages and disadvantages of the type of provider
- How they wish to operate their account
- How safe their funds are (such as membership of FSCS)
What are banks?
Banks are public limited companies (PLCs) that sell a wide range of financial products and services to businesses as well as customers
What is the part of banks' business that deals individual customers known as?
What 5 things are people enabled to do from banks' products and services?
- Make transactions
- Protect themselves
What 2 things do PLCs do?
- Raise money to fund their operations by selling shares on the stock market
- Pay dividends each year
Who are the people that buy shares?
Shareholders - they own part of the organisation
What are shareholders motivated to buy and keep shares by?
Receiving part of the profit that the bank makes - called 'dividends'
What do banks need to take into account when calculating their interest rate margin, and what could this result in?
The need to make dividend payments - this could result in higher interest rates for borrowers and that they pay lower rates to savers, than other types of providers
Give 2 advantages of banks.
- Larger banks offer a wider range of products and services
- Larger banks have funds to invest into new products and services (e.g. First Direct)
Who launched the first telephone and online operated bank, and when?
HSBC launched First Direct in 1989, which was open 7 days a week, 24 hours a day
What did First Direct launch the first of and when?
A mobile banking app in 2011
Who launched the first contactless payment cards?
Give 2 disadvantages of banks.
- Customer service may be less efficient than in smaller organisations
- Banks are global organisations and are susceptible to global financial problems (e.g. the 2007 'credit crunch' affected many UK banks)
What do all financial providers offer the protection of?
What are building societies?
Mutual organisations owned by their customers, who are called members
What do building societies offer?
Mortgages, savings and more recently current accounts, credit cards and insurance
Give 5 advantages of building societies.
- All customers are members who have a say in how the society is run (via voting at AGM)
- They do not have shareholders and therefore do not need to pay dividends from their profits (which increases a banks running costs)
- All profits made by the building society are used to benefit its members; this may enable building societies to charge lower interest rates on borrowing and pay higher rates on savings, than banks
- Better customer service and customer satisfaction; the mutual status is the main reason for this
- Much smaller than banks = more focus on customers
Give 2 disadvantages of building societies.
- The size of building societies can be considered a disadvantage as well as an advantage as they are unlikely to spend the same amounts of money on research and development as large banks can
- They have to rely on partners to offer certain services such as insurance policies
Why are building societies smaller organisations than banks?
- They operate mostly in the UK and often have a local focus
- At least 75% of their assets must be mortgages
- There are restrictions on the amount of unsecured loans that building societies can make
What did building societies claim the restrictions on the amount of unsecured loans that they could make did?
Prevented them from growing and so they changed their mutual status to banks
What is the process of building societies becoming banks called?
What happens normally when building societies become banks?
They become part of a larger organisation, not as individual providers
How are credit unions similar to building societies?
They are also mutual organisations owned and run by the individuals who are members
What is the key difference between credit unions and building societies?
The majority of credit union members must share a common bond
What is a common bond?
An interest or circumstance shared by a group of people, for example working for the same employer or living in a certain area
When were changed to credit unions made?
8th January 2012
What changes were made to the law regarding credit unions?
- To offer membership to more than one group of people, reducing the focus on the common bond
- To include organisations such as community groups, businesses and social enterprises, as well as individuals
- But there are still restrictions on the amount of members for these groups, but the changes have allowed the option of more members so attracting more savings and being able to offer more loans
What are the 4 products offered by credit unions?
- Savings and loans: they used to just pay dividends, if the credit union made a profit. But since the changes they can choose to offer a guaranteed interest rate.
- Life assurance
- Current account: cash or debit card
- Pre-paid payment card
Give 4 advantages of credit unions.
- They have lower operating costs than other providers
- The profits are used for the benefit of the members, not external shareholders
- They provide a loyal, community focused service
- They inspire customer loyalty through the common bond
Give 2 disadvantages of credit unions.
- Limited product range
- Limited size to loans
When was National Savings and Investments (NS&I) given its name?
What are people doing when buying NS&I products?
They are lending money to the government
What is done in return to people lending money to the government through buying NS&I products?
All the money in NS&I products is guaranteed to be 100% safe by the Treasury
What NS&I products are offered?
- A cash ISA
- A savings account
- An investment account
- Income bonds
- Children's bonds
- Premium bonds
How much can be saved in premium bonds?
Between £100 and £30000 and funds can be withdrawn without penalty
What are 2 features of premium bonds?
- The NS&I do not pay interest on them
- Every month Premium Bonds are selected at random to win a £1m jackpot and over 1 million other cash prizes
Since what date can you only apply for and operate NS&I products online, by telephone and by post?
How many branches does the Post Office have in the UK?
How many villages does the Post Office visit with its mobile vans?
Who are the financial products and services offered by the Post Office provided by?
Its partner banks and insurance companies
Give examples of the products and services offered by the Post Office.
- A current account, savings accounts, mortgages and a credit card (provided by Bank of Ireland UK)
- A budget card (provided by Bank of Ireland UK)
- Loans (provided by Bank of Ireland Personal Finance Limited)
- A Premier Cash ISA (provided by Family Investments with money deposited at Bank of Ireland UK)
- A card account to receive benefits, tax credits and pensions (provided by J.P. Morgan Europe Ltd)
- Home and car insurance policies (provided by BISL Ltd)
- Travel insurance (provided by Ageas)
- Life cover, including free new parent life cover (provided by Aviva Life and Pensions)
- Pet insurance (provided by AXA)
What does the Post Office also allow?
Free deposits and withdrawals from most other UK banks at its branches and at its ATMs, and sells foreign currency with no commission fees
Who are some of the products that are offered by the post office designed for in particular?
To meet the needs of people on low incomes
How much does the Irish Deposit Compensation Scheme cover?
Amounts up to 100,000 euros
What are the 'Big 4' banks in the UK?
Barclays, HSBC, Lloyds Banking Group and RBS
How do the 'Big 4' banks communicate?
Via branches, websites, online banking, telephone banking, post and mobile texts
What are communication channels also known as?
Give 3 advantages of branches.
- Customers can gone in and talk to someone in person, which many customers prefer, especially the elderly
- The branch can advertise all of its products
- Branch staff offer a personal service
Give 2 disadvantages of branches.
- The branches may not be convenient to visit, as they are open when most people are at work/school/uni
- They are expensive to run for the provider, the costs of this ends up being passed onto the customers, through higher product charges
Give 5 advantages of online banking.
- Have access 24 hours a day, 7 days a week
- Carry out banking transactions immediately, such as transfers between accounts and payments
- Research products
- Apply for products online
- The costs are much lower for the provider and these can be passed onto the customer
Give 2 disadvantages of online banking.
- Security issues: although providers have introduced anti-fraud software, customer passwords and card readers
- Lack of personal contact to ask questions: providers now offer customers easy access to staff via the website. This may be via email, requesting a telephone call or FAQs
Give 5 advantages of telephone banking.
- Customers can contact their bank from wherever they are
- The call centre has longer opening hours than branches, some are open 24 hours a day
- Call centres are less expensive to operate than branches for providers
- Customers can access specialist advice that is not available in branch (e.g. speaking to the credit card dept)
- Customers can ask questions to clarify concerns
Give 2 disadvantages of telephone banking.
- Potential fraud: security systems are in place, such as passwords and details of the customer's last statement
- Quality of customer service: problems such as difficulty getting through, the person answering the call does not always understand your question
What is the main advantage of mobile banking?
It is quick and convenient for customers and providers
What is the main disadvantage of mobile banking?
It requires sophisticated security to ensure date remains safe
Give 3 advantages of postal banking.
- It delivers a physical message, which customers can spend time considering and keep for future reference
- Providers can use statement inserts to advertise their products
- Post is the most convenient way to return a signed contract or supply other paperwork
Give 2 disadvantages of postal banking.
- It takes time for the information to arrive
- These is a potential risk of documents getting lost in transit
What are the main 3 steps of choosing a financial product?
1) Assess personal circumstances to see which product you want
2) Research the best rates available - not only price
3) Choosing a provider
What are the main 3 considerations of choosing a financial service provider?
1) Stay with existing provider or switch?
2) How do you wish to communicate with the provider?
3) What type of provider do you prefer?
Who should someone with more than £85,000 to save choose to save with?
NS&I because their funds will be 100% safe
What do the Financial Conduct Authority and Prudential Regulation Authority do?
They are the regulators that set out the rules providers must follow and supervise their operations
What does the Financial Ombudsman Service do?
Handles customer complaints about providers
What does the Financial Services Compensation Scheme do?
It will repay customers' deposits of up to £85,000 if their provider cannot
What does the Office of Fair Trading do?
Protects against unfair practise and authorises consumer credit providers
What is the Lending Code?
Sets out how providers should act when offering and managing borrowing products
What were many of the consumer protection measures than are now in force set up as a direct result of?
The global financial crisis that started in 2007 and is known as the 'credit crunch'
Give 3 causes of the 2007 credit crunch.
- Banks lent money to people who were likely to be unable to repay
- Banks used money from their retail business (i.e. for individuals) to pay the losses made by their investment operations (that buy stocks and shares and derivatives), so they did not have enough money to repay depositors when individuals wanted to withdraw
- The UK market was dominated by very large banking organisations that were considered 'too large to fail', whose going out of business would have been disastrous for the rest of the economy
What was the response to the credit crunch?
The setting up of an Independent Commission on Banking by the Government - to recommend how such a situation could be avoided in the future
What were the 5 key recommendations of the Independent Commission on Banking?
- Improve the regulation of providers
- Make sure banks are able to absorb losses
- Reduce the amount of risks banks take
- Separate retail banking from investment banking
- Make it easier and less costly to deal with banks in financial trouble
What was the first legislation to implement the recommendations of the Independent Commission on Banking to be passed by the Government, and when?
The Financial Services Act, on 19th December 2012, which came into force on 1st April 2013
When was the Financial Services Bill introduced, and what does it focus on?
4th Feb 2013, focusing on the structure of the UK banking sector
What were the 3 main changes included in the Financial Services Bill?
- UK banks must separate everyday banking activities from more risky investment bank activities, such as trading in stocks and shares (ring-fencing)
- Depositors who are covered under Financial Services Compensation Scheme must be repaid as a priority if the bank fails
- The government will have powers to ensure that banks can absorb losses more easily
What is regulation?
The process of supervising the actions and businesses of financial services providers. It also promotes consumer confidence and protects people from dishonest, incompetent or financially unstable providers.
What is the Financial Policy Committee (FPC)?
Part of the Bank of England - monitors and responds to risks posed to the whole of the financial services market.
Why is the Financial Policy Committee (FPC) called a macro-prudential authority?
Because it looks at problems that could arise for the market as a whole, rather than individual providers
What role does the Chancellor of the Exchequer in the Treasury have in the regulatory system?
Has powers to direct the Bank of England to take action if there is a serious threat to the financial stability of the market and public funds (such as the money raised from taxes) are at risk
What does Prudential Regulation Authority (PRA) look at?
The risk that individual providers might present to the stability of the financial services market
What conditions are included in the requirement that providers must meet to manage risk?
- Holding enough cash (liquidity) and having enough capital (funds) to absorb a certain level of losses
- Having suitable management
- Being fit and proper
- Conducting business prudently, i.e. managing risk well to ensure the business is safe and sound
Which 3 bodies is the work of the regulatory system supported by?
- Money Advice Service
Give 2 examples of actions that the PRA could take and have taken.
- It has required banks to raise extra capital from their shareholders so that they are less likely to fail in a crisis
- It could require providers to change their lending criteria if it judges they are lending to people or businesses that cannot repay the loans
What is the Financial Conduct Authority (FCA) responsible for?
Making sure that all providers conduct their businesses in a way that benefits consumers and the market as a whole
What are the 3 objectives of the Financial Conduct Authority (FCA) set out in the Financial Services Act?
- To protect consumers
- Enhance the integrity of the UK Financial System
- Help to maintain competitive markets and promote effective competition in the interests of consumers
Give 3 examples of actions that the FCA could take when it discovers providers have broken rules relating to the way they carry out their business activities
- Imposing fines on providers
- Taking senior managers to court
- Pressing for compensation for consumers
What is the Financial Ombudsman Service (FOS) funded by?
Levies on providers and case fees paid by providers that have complaints brought against them
What can the FOS order providers to pay?
Compensation up to a maximum of £150,000
What are the 3 steps that customers that wish to make a complaint about their provider should do?
1) Customers should write to the provider about the problem, if no satisfactory reply, take matter to FOS
2) Contact FOS within 6 months of having response from provider
3) Still not happy, take matter to court
What is the Financial Services Compensation Scheme (FSCS) funded by?
Levies imposed on providers, made in proportion to the size of the provider
On 1st April 2014, which company took over some of the role of the Office of Fair Trading?
Give an example of an action taken by the OFT?
Susending or removing a provider's credit licence
Who was a current account switching service launched by and when?
The Payments Council, implemented in 2013
As well as formal regulation, how do providers regulate themselves?
By agreeing voluntary codes of conduct, e.g. the Lending Code, which sets out minimum standards of good practise for banks, building codes and credit card providers
Give examples of what is included in the Lending Code.
- Advertising that is fair and not misleading
- Giving customers information before, at and after sale about how products work, including terms and conditions, interest rates and charges
- Giving customers information about changes to their product/service, such as changes in interest rates
- Lending responsibly
- Dealing with customers quickly and sympathetically when things go wrong
- Keeping personal information on customers private and confidential and providing secure and reliable banking and payment system
- Training their staff to put the Code into practice
What are the 3 main tools people can use to manage their finances?
- Cash flow forecasts
- Records of actual income and expenditure and any difference between the planned and actual figures
What is a budget?
A financial plan that shows a person's income and expenditure for a defined period of time, e.g. a month
What are the 3 main decisions that can be made after making a budget?
- What you can afford to spend, repay and/or save
- What your financial priorities and goals are
- What to do if you're spending more than you're receiving
What are the main components of a budget?
Income, expenditure over a specific period of time and the difference between the 2 figures, which is the balance
What does income mean?
Money received and it includes money coming in from all sources, both earned and unearned
Where is earned income from?
Work on either an employed or self-employed basis
Give 3 examples of earned income on an employed basis and 2 on a self-employed basis.
- Weekly income or monthly income
- Basic income plus bonus
- Basic income plus commission
- E.G. A painter gets paid a deposit and the rest at the end of the job
- E.G. A physiotherapist gets paid per treatment
Give 7 examples of unearned income - from any source that is not work.
- State and private pensions
- Interest on savings
- Allowances paid by family members
- Financial gifts (e.g. xmas)
- One off payments (e.g. win on premium bonds, inheritance)
What are the 3 broad categories that expenditure falls into?
What does mandatory expenditure mean?
The payments are compulsory, they do not necessarily apply to everyone, but if they do apply they must be paid
Give 4 examples of mandatory expenditure.
- Income tax and National Insurance contributions (once these have been deducted this is referred to as net income)
- Council tax, a payment made to the local authority towards the cost of local facilities (the amount you pay depends on the value of your home)
- TV licence
- Motor insurance, road tax and MOT; these are a legal requirement for everyone who drives on public roads
What is essential expenditure?
Spending on items that people need to live
Give examples of essential expenditure.
- Rent or mortgage payments
- Food or drink
- Water supplier
- Gas and electricity suppliers
- Basic clothing
- Travel to work (petrol)
- Loan repayments (these are essential expenditure to maintain a good credit history)
- Mobile repayments
- Personal pension payments
- Insurance (buildings and content insurance, breakdown cover, life assurance)
What is discretionary expenditure?
Voluntary expenditure on products and services that people want now and saving towards items that they aspire to buy in the future
Give examples of discretionary expenditure.
- Fashion items
- Meals in cafes and restaurants
- Cinema tickets
- Music downloads, DVDs and games
- Driving lessons
What is the budget if the balance is zero?
The budget is balanced, with all income assigned to be used on making payments, repaying borrowing or saving
What is the budget if the balance is positive?
Means that the budget is in surplus and there is money available to increasing spending, make larger debt repayments, if applicable, or to save. People with budgets that are balanced or have a surplus are described as living within their means.
What is the budget is the balance is negative?
Means the budget is in deficit. If people calculate their budget and discover that outgoings are greater than incomings, they can choose to increase income (if possible), decrease spending or borrow.
How can people monitor their incomings and outgoings?
People can view current accounts and credit card transactions online and on paper statements, keep receipts, record transactions and check account balances on ATM
Give 3 examples of what someone could do if their actual budget is in deficit?
- Increase their income by working more hours, if possible
- Cut back on spending
- Borrow money
What 5 things can people use cash forecasting for?
- To predict outgoings and incomings
- When irregular income will be received
- When unusually large payments must be made
- Options for how to finance short-term deficits
- When they might have surpluses they can use to save or to make larger repayments on debts
What do people need to consider when people budget and forecast their cash flow?
The impact that the cost of living will have on their outgoings, such as housing costs, like mortgages and rents, fuel costs, gas and electricity, food costs
What are insurance policies?
Financial products designed to protect people from the financial losses associated with unexpected events
What are the 4 main types of insurance?
- General insurance
- Life cover
- Health insurance
- Pensions policies
What are 2 other ways that people can deal with the risk of losses due to unexpected events, other than buying insurance?
- Saving for emergencies
- Borrowing to make repairs or replace items
What is the price of an insurance policy called?
What are the 5 things that a premium is based on?
- How likely the events is to occur
- The amount of money needed to put things right
- The length of time the policy will be in force
- The voluntary excess
- How the premium is paid (one payment or in monthly instalments)
How do insurance companies calculate the risk of an event happening?
They require detailed information from the person applying to buy the insurance
What do people who have insurance but do not claim receive?
They build up no claims discount for each year they do not claim
What lowers the premium?
A higher no claims
What 7 questions are you asked when applying for motor insurance?
1) Where you live
2) Do you have off street parking
4) How long you've been driving
5) Details of penalty points or convictions
6) Whether you have made a claim on a motor insurance policy in the past
7) What sort of car you drive
Since Dec 2012, gender no longer determines a premium
What are most insurance premiums subject to?
Insurance premium tax
What is the most common tax on an insurance premium?
What is the tax on travel insurance premiums?
What happens if someone enters misleading information on an application form for insurance?
The insurance policy is void and the insurer will refuse any claims made on it
When did the Consumer Insurance Act 2012 come into force?
What is the Consumer Insurance Act 2012?
The act makes it the insurer's responsibility to ask for all the information they require to calculate the premium - it is hoped that far fewer claims will be rejected on the basis of failure to disclose information
What 2 things do people receive when they have paid the insurance premium?
- Policy documents (this covers what is in the policy and the terms and conditions)
- Certificate of insurance (details who the policyholder is an provides a summary of the cover given; this is the proof that the policyholder is covered, and will include a policy number)
At what 2 times are the policy documents and certificate of insurance needed?
- Following an accident
- When buying road tax
What was made compulsory in the Road Traffic Act 1988?
For people who drive to have at least third-party motor insurance
What is third-party insurance?
Insurance that covers damage that the policyholder causes to someone else (the third party) or to their property but does not cover the policyholder for any injury or loss that they suffer themselves
What is comprehensive motor insurance?
All third party and fire and theft items and accidental damage to the drivers car, personal accidents benefits, medical expenses, loss or damage to personal possessions
What are some premiums quoted with?
Standard 'extra' services such as cover for legal costs
What happens to people that are caught driving without insurance?
They can be fined £200 and given 6 penalty points on their driving licence; if the case goes to court they can be fined up to an additional £5000 and disqualified from driving
How can people who don't drive very much reduct the costs of insurance?
By choosing a pay-as-you-go policy
How does a pay-as-you-go insurance policy work?
The insurer fits a GPS tracking device, sometimes called a 'black box' to the car - this record the amount of miles driven and the driving habits in terms of speed, the type of road, the time the journey is made in and how the driver is braking and cornering. This information is sent to the insurer by satellite and is used to charge insurance on a per-mile cost. They may not work out cheaper if the driver travels in peak hours. Also some insurers charge a fee for the black box and/or installing it in a car.
Give examples of ways to reduce the cost of motor insurance.
- Shop around and compare details of what is covered by the policy
- Fit an approved alarm or immobiliser
- Keep a car in a garage
- Pay a voluntary excess
- Only use the vehicle for social, domestic and pleasure purposes, as business increases the premium
- Take an advanced driving course
- Pay the premium in a one off payment
- Drive a low powered car
What does buildings insurance cover?
The cost of repairing or rebuilding a property if it is damaged or destroyed. The policy will need to cover the cost of rebuilding the property. Most mortgage lenders will insist that borrowers take out building insurance to protect the property on which the mortgage is secured.
What does contents insurance cover?
Belongings kept in the home that people can take with them when they move, such as TVs
What can policyholders pay extra and receive cover for?
Accidental damage or loss
What are the 3 other types of insurance?
- Pet insurance
- Travel insurance (covers medical costs, replacing luggage and belongings that are lost, stolen or damaged)
- Mobile phone insurance (covers loss or damage to mobiles)
Give 4 other ways to deal with unexpected expenses.
- Revising budgets (adjust discretionary expenditure)
- Saving (the Money Advice Service suggests having enough in emergency funds to pay for mandatory and essential expenses for three months)
- Borrowing (using short term methods, overdraft, personal loan or credit cards)
- Benefits (JSA, Incapacity benefits)
What are the 4 main ways to deal with unexpected income?
- Save it?
- Pay back borrowing?
- Spend it?
- Create emergency fund?
What is the Money Advice Service (MAS)?
An independent organisation set up by the government to help people to understand financial issues and manage money better. It provides advice online, over the phone and face to face.
What is the StepChange debt charity?
This gives free debt advice, online and by telephone to help people prepare a budget and work out a plan to reduct their debts
What is Citizens Advice?
This is made up of a network of Citizens Advice Bureaux in England and Wales. This service provides free, independent, face to face advice on a range of issues.
What is National Debtline?
A free, confidential and independent service providing personalised debt advice by phone, email or using the online tool 'My Money Steps'. It also provides a range of fact sheets.
Give 5 examples of actions that people could consider in situations where they find it more difficult to repay debt.
- Getting free, impartial advice from debt organisations and websites
- Using a budget to calculate what they can afford to repay and changing products or negotiating agreements with lenders to repay a smaller, affordable amount each month
- Selling an asset such as a car or jewellery and using the proceeds to repay debts
- Prioritising debts in terms of the consequences of not repaying and the cost of the borrowing (APR and fees)
- Using formal debt management processes such as a debt relief order (DRO), an individual voluntary agreement (IVA) and bankruptcy.
Give 4 examples of organisations that provide free, impartial debt advice.
- Money Advice Service (MAS)
- StepChange Debt Charity
- Citizens Advice
- National Debtline
How may people who are finding it difficult to repay debt be able to increase their income?
- Claiming all the benefits they are entitled to
- Selling an asset
- Taking on more work
How can people work out a realistic payment plan for debt repayments?
On their own or get free help from experienced advisers, such as Citizens Advice or the StepChange Debt Charity
In what way can people with a good credit rating reduce credit card debts?
By switching credit card debt to a card that does not charge interest on balance transfers - this stops the original debt growing and gives the borrower time to repay, but this only works if the borrower does not make any new transactions and can afford to repay within the interest-free period
What can people who are struggling to repay a loan do?
They may wish to consider extending the term of the loan - however they need to consider that repaying over a longer period of time will reduce the monthly payments but increase the overall cost of the loan
What can people with a number of different debts, such as an overdraft and several credit cards do?
They may consider taking out a loan and using the funds to repay all the other debts, so they have just one monthly payment to make. However, it is important that borrowers consider that the interest rate could be higher on this type of loan and they must be able to afford the repayments.
This approach will not work if people continue to borrow on their credit cards and overdrafts, as the debts will grow again. Also, sometimes these loans are secured on the borrower's house. This means the borrower could lose their home if they do not repay on time and in full.
What is important if people owe money on a number of different borrowing products?
That they prioritise the most expensive debt first so that they reduce the cost of the borrowing as quickly as possible
What is usually the most expensive borrowing?
Credit cards and unauthorised overdrafts - but if people have borrowed from payday lenders or doorstep lenders these are by far the most expensive
How may someone be able to obtain a loan when they find it difficult to get it approved?
By using a guarantor - this means that the guarantor is legally obliged to pay the loan payments if the borrow misses a payment
What can people that find they have many debts and are struggling to repay all of them do?
Set up a debt management plan with a debt management company (DMC)
How does a debt management company work?
People pay the DMC what they can afford each month and the DMC divides this payment among the organisations that are owed money - this means that the person in debt (debtor) does not need to deal with the organisations that they owe money to (creditors)
Who are debt management plans offered by?
Charities such as StepChange Debt Charity and Payplan, free of charge (most other organisations charge fees)
Give 3 advantages of a debt management plan.
- The person in debt makes one affordable monthly payment to the DMC, which is easier for them to manage
- The DMC arranges the plan and shares the monthly payment between them
- The person in debt has longer to repay what they owe
Give 4 disadvantages of a debt management plan.
- DMCs only deal with non-priority debts such as repayments on loans, mortgages and rent arrears
- Creditors might still contact the person who owes them money and ask for further payments
- Creditors do not have to accept a debt management plan
- The debt will take longer to clear because the monthly repayments are smaller. However, many creditors will stop adding interest and fees to the debt as long as the repayments are being made.
What are repayment plans that are arranged by county courts in England, Wales and Northern Ireland called?
Who do administration orders apply to?
People who have less than £5000 in unsecured debt and at least one county court judgement (CCJ) against them
How do administration orders work?
People can apply to the court to have an administration order issued. They then pay what the court decides they can afford to the court once a month, and the court makes repayments to their creditors.
Give 3 advantages of administration orders.
- The person who owes money makes one monthly repayment that they can afford
- Creditors are not permitted to contact debtors directly to ask for further payments and they are not permitted to add interest to the debt
- If the debtor cannot repay the debt in a reasonable time, the court can set an end date for the administration order. Creditors must write off any debt that is still outstanding after this time. The court agrees that the debtor will not repay all of the debt by issuing a composition order.
What is the main disadvantage of an administration order?
The court decides what the debtor can afford to repay and this may mean that the debtor has to live on a very tight budget while the debt is being repaid
Why are people insolvent?
If they cannot repay what they owe because their debts are greater than their assets (property and goods that they own)
What are the 3 solutions for insolvency in England, Wales and Northern Ireland called?
- Individual Voluntary Arrangements (IVAs)
- Debt Relief Orders (DROs)
What is an Individual Voluntary Arrangement?
Under an IVA people make reduced, affordable repayments for 5 to 6 years and then their debt is written off - IVAs are legally binding arrangements on debtors and creditors
Who do IVAs apply to?
People who have unsecured debts that are larger than the value of their assets
How do IVAs work?
An insolvency practicioner (IP) negotiated the arrangement with the person's creditors. As long as the creditors who hold 75% of the debt agree, the IVA can proceed. If they do not agree, or the person who owes money does not keep up the repayments, the person can be made bankrupt.
Give 5 advantages of an IVA.
- Debtors can make affordable repayments for a set period of time
- Outstanding debt is written off
- An IP (usually a solicitor or accountant) negotiates with creditors on the debtor's behalf
- Creditors cannot add any more interest or charge to the debt
- Creditors cannot take court action against the debtor
Give 2 disadvantages of an IVA.
- The IVA cannot proceed if the creditors that hold 75% of the debt don't agree
- If the debtor doesn't keep up payments the person will be made bankrupt
What do Debt Relief Orders (DROs) enable people to do?
Write off their debts if they are unable to repay them after 12 months
Who do Debt Relief Orders (DROs) apply to?
- Owe less than £15,000 in unsecured debts (DROs do not apply to student loans)
- Are not homeowners
- Have no more than £300 in assets (although they can own one vehicle worth up to £1000)
- Have less than £50 a month left over after they have paid their living expenses
What must debtors pay for the DRO?
Who must debtors apply to for a DRO?
The courts through an authorised adviser
How long are debts in a DRO frozen for?
12 months, so creditors cannot add any interest or charges to them (creditors are not permitted to contact the debtor to ask for payment during this time)
What happens to the debt if the debtor's ability to repay has not changed after 12 months in a DRO?
It is written off
Give 4 advantages of a DRO.
- Household goods and tools of the trade are not included in the asset calculation
- It gives the debtor time to change their personal circumstances if they can, e.g. finding work
- Debtors will not be pressurised to repay during the 12 month period and their debt will not grow
- It is a cheaper insolvency solution than bankruptcy for people who have low incomes
Give 2 disadvantages of a DRO.
- It stays on a person's credit history for 6 years and will make it difficult for them to borrow money during this time
- The cost of £90, although lower than other options, can be difficult for people on very low incomes to pay
What is bankruptcy?
A court order that means a person's assets are shared between their creditors who write off the remaining debt
Who is appointed in the bankruptcy process?
An official receiver is appointed who can sell the person's assets and use any savings and the debtor's income to repay creditors
Who can apply to become bankruptcy?
The person themselves, or one of their creditors can apply to make them bankruptcy
What is the bankruptcy fee in England and Wales?
What is the bankruptcy fee in Northern Ireland?
What bankruptcy fee may people on low incomes and benefits be charged?
£525 in England and Wales, and £532 in Northern Ireland
Give 4 advantages of going bankrupt.
- Debtors do not deal with the creditors directly
- Debts can be written off in 12 months
- Debtors keep certain possessions
- When bankruptcy is over, debtors have a fresh start
Give 10 disadvantages of going bankrupt.
- There are costs involved
- Debtors cannot apply for more credit while they are bankrupt
- Debtors can only use basic bank accounts as they cannot go overdrawn
- The record of bankruptcy remains on the debtor's credit history for 6 years, after the start of bankruptcy. This makes it difficult to obtain credit during this time.
- Many of the debtors assets have to be sold to repay their debts, including their home and car
- Details of bankruptcy are published and may be recorded in the media
- Some debts such as student loans and court fees are never written off
- If the court considers the debtor never intended to repay the debts or did not cooperate with the official receiver, it can issue a bankruptcy restriction order that lasts for 15 years
- People who have been declared bankrupt are barred from occupations, e.g. financial services - so the debtor would lose their job in this instance
- Debtors who own a business normally see it closed down
What are the 4 insolvency solutions in Scotland?
- Debt payment programme
- Trust deed
- Low income low assets (LILA) bankruptcy
What is the Dept Payment Programme (DPP)?
Run by the Scottish government and is similar to a debt management plan. People must owe money to one creditor or more and must be able to afford some repayments. They make payments to the programme, which are then shared among creditors.
What is a Trust Deed?
This is similar to an individual voluntary agreement (IVA). An insolvency practitioner helps people who are insolvent to make repayments they can afford and after 3 years any outstanding debt is written off.
What is low income low assets (LILA) bankruptcy?
This is similar to a debt relief order. An accountant in bankruptcy deals with the bankruptcy, using the debtor's assets to repay creditors and writing off unsecured debts after 12 months.
Who does low income low assets (LILA) bankruptcy only apply to?
- Earn the standard minimum wage for a 40 hour week
- Own less than £10,000 worth of assets, with no one asset worth more than £1,000
- Do not own property
What does a LILA bankruptcy cost?
What is sequestration?
Sequestration is the term for bankruptcy in Scotland. It applies to people who owe more than £1,500, have not been bankrupt in the last 5 years and have had judgements for payment made against them.
What does sequestration cost and how long does it usually last?
Costs £200 and usually lasts 12 months
When was the National Minimum Wage (NMW) introduced?
When does the National Minimum Wage apply from?
1st October in one calendar year to 30 September in the following year
What age must people be to get the minimum wage?
Of school leaving age, the last Friday in June in the school year when they had their sixteenth birthday
What is the National Minimum Wage for people aged 21 and over?
What is the National Minimum Wage for people aged 18 to 20?
What is the National Minimum Wage for people aged under 18?
What is the National Minimum Wage for Apprentices under 19 or in their first year?
Give examples of exceptions to the National Minimum Wage.
- People on work experience who are not trainees such as interns
- Trainees on some government schemes
- Members of the armed forces
What can an employee do if they are entitled to the National Minimum Wage but are not receiving it?
Take their employer to an industrial tribunal; the government also offers a confidential helpline for workers who are in dispute
What are 'zero hours' contracts?
These mean that people agree to be available for work as and when required but do not have any guarantee of hours or times of work. Workers who have these contracts are entitled to the National Minimum Wage when they are 'on call' at the employers premises. It is illegal for employers to insist these workers are on site and then not use them and refuse to pay them.
What terms were specified in the working time regulations introduced in 1998?
- An employee can work a maximum of 48 hours, averaged over 17 weeks, unless they choose to work longer
- An employer, who works 5 days a week, is entitled to at least 5.6 weeks paid holiday per year. Employers can choose to include bank holidays in this figure. A part timer is entitled to a pro-rata equivalent (E.G. 3 days x 5.6 days = 16.8 days per year)
- An employee is entitled to at least 11 hours consecutive hours rest in any 24 hour period
- If the working day is longer than 6 hours, they are entitled to a 20 minute rest or lunch break
- An employee is entitled to at least one day off each week
To which people do the working time regulations not apply to?
The armed forces, emergency services, domestic workers in households (like nannies) or where 24 hour staffing is required
Where should an employee's working hours, annual leave and rest periods be set out?
In the employee's contract of employment
What must everyone who receives an earned or unearned income pay?
Income tax and National Insurance contributions once they earn more than a minimum amount called a personal allowance
What determines whether people pay tax?
The amount they earn
What is the personal allowance for 2014/15?
How do people calculate how much income tax they owe?
- Subtracting their personal allowance from their gross annual income to find their taxable income
- Working out which tax band applies to their taxable income
- Calculating the amount of tax using the tax rates for each band
What are the tax rates and bands for 2014/15?
£0 - £31,865 = Basic Rate 20%
£31,866 - £150,000 = Higher Rate 40%
> £150,000 = Additional Rate 45%
What are the income tax rates and bands charged on savings interest for 2013/14?
£0 - £2,880 = Starting Rate 10%
£2,881 - £31,865 = Basic Rate 20%
£31,866 - £150,000 = Higher Rate 40%
> £150,000 = Additional Rate 45%
What can savers in the position of being automatically deducted 20% tax from their savings interest do?
Claim back the overpayment of tax that their provider has made by contacting the financial provider or the HMRC
What is the 20% tax paid by the provider called for savers who fall into the basic rate?
Income tax deducted at source
Who can pay National Insurance contributions?
People who work if they are:
- Aged between 16 and the state pension age
- An employee earning more than £153 per week
- Self-emploued and making a profit over £5885 a year
What can the amount of national insurance contributions you make influence?
Your entitlement to state benefits, such as JSA and bereavement benefits
What will the government introduce from April 2016?
A flat-rate state pension of about £144 per week that all pensioners will receive, regardless of their contributions
What does the amount of National Insurance that an individual pay depend on?
Their employment status and income:
- Employees pay Class 1 contributions of 12% on earnings between £153 and £805 per week, an 2% on earnings over £805 per week
- Self-employed people pay:
a) Class 2 contributions at a flat rate of £2.75 per week
b) Class 4 contributions of 9% on annual taxable profits between £7,956 and £41,865, and 2% above that
What are employees' income tax and NI contributions paid by their employer direct to the HMRC through?
PAYE (pay as you earn) scheme - the employer paid the employee net of these contributions
What must self-employed people complete for tax and NI?
A self-assessment - this involves completing tax forms called tax returns once a year
What comes under the Employment Rights Act 1996?
The fact that employers must provide employees with details about income tax and National Insurance paid on their wages
What are the 3 documents involved in the detailing of income tax and NI paid by employees?
- A payslip
- A P60
- A P45
What must a payslip show?
Earnings before and after deductions, explain the deductions and show how the wage is paid
How do employers work out how much tax to deduct from earnings?
Using a tax code - these are 4 numbers and a letter
What is a P45 and what does it show?
By law an employer has to provide a P45 to an employee when they stop working for them - which shows;
- Tax code and PAYE reference number
- NI number
- Leaving date
- Earnings in the tax year so far
- Tax paid so far
What can an employee use a P45 for?
They can give this to their new employer, so they can calculate how much income tax and National Insurance needs to be deducted
What is a P60?
An employer must issue this at the end of every tax year - it summarises the tax paid by the employer for the tax year that has just ended
What can employees use P60s for?
To prove how much they have earned and how much income tax and NI contributions have been deducted from their salary
What 4 things may an employee need the information provided by a P60 for?
- Complete a self-assessment tax return
- Claim back overpaid income tax or NI contributions
- Apply for tax credits
- Apply for a loan or mortgage
What does the tax return that is completed by some people tell the HMRC?
About their earned and unearned income (e.g. people who are self-employed or need to pay extra tax on their savings interest)
What does a tax return cover?
Income received in one tax year which is 6 April to 5 April the following year
How can a tax return be completed?
Online or on paper
How is the tax owned by people who complete tax returns?
They do not calculate it - HMRC will calculate it on the basis of the figures entered on the tax return
What are the 3 deadlines for when the HMRC must receive a completed tax return and when people must pay the money they owe?
- Paper returns must be received by midnight on the following 31st October
- Online tax returns must be received by midnight on the following 31st January
- The final payment of tax due must be received by midnight on 31st January
What do people need before they can set up an account to complete tax returns online?
An activation code - although it takes time for the HMRC to send this, so it is important to plan ahead if they are to meet the online return deadline
For how long should people keep records that relate to the tax return?
At least 22 months after the end of the tax year
As well as completing tax returns and paying what they owe on time, what else do self-employed people need to do?
Make payments 'on account'
What does payments 'on account' mean?
That people make advance payments on the tax they owe for the next tax return on 31st January and 31st July
When must payments on account be made?
If the tax due will be more than £1000 and 80% or less has been collected at source