FINANCIAL LITERACY

1. I have recently left school and have commenced full-time employment.  I am thinking of getting a credit card but there are so many different types and terms and conditions that I’m not sure which one would best suit my needs.  My intention is to use the card to pay for the majority of my expenses (everything that can be paid for using credit) and then pay the card off in full at the end of the month.  Can you recommend two cards that would suit my needs as well as provide any advice or traps to avoid?

Almost all of the big banks have a low rate credit card, however the two best options for you would be the low rate cards from the Commonwealth Bank and NAB. The Commonwealth Bank offers a low rate card with an annual fee of $78 and a purchase interest rate of 13.49%. NAB has an annual card fee of $59 and is offering a special introductory offer for the first 12 months with a 0% purchase interest rate. After the first 12 months this rate increases to 13.99%. Most banks also offer a Debit MasterCard or Visa. These cards have most of the same features as a credit card, for example the ability to purchase items online or over the phone and PayWave or Pay Pass. However these cards use your money, not borrowed money from the bank, and can be a much better option for students who potentially don't have the ability to pay back the debt they create with a credit card. The worst thing a person can do with a credit card is to start thinking its free money or their money, this can lead to all payments being made on the card and repayments becoming impossible. There is also the option of Credit Unions and Societies. These institutions may have lower interest rates but they are not as stable as one of the Big Four Banks. Traps to avoid include late fees. Make sure you read the fine print and pay your bill in full by the due date, otherwise late fees could make this bill a lot higher. Don't just pay the minimum amount owing either, doing this will extend the life of your debt and rack up an interest bill that may mean you are in debt for many many years.

 

2. I am about to move out of home and need to purchase some furniture for an apartment I have rented with a friend.  I am constantly seeing deals on the TV advertising ‘nothing to pay’ for anywhere between 12 and 48 months.  Can you provide some information on these types of deals, their pros and cons and the level of interest I would be expected to pay if I did not pay off the amount owing in the designated time period?

‘Nothing to pay’ deals are great if you can make all repayments and stick to the conditions of the deal. These deals allow you to have the product now and pay later. Pros of this type of deal include obtaining a credit rating or contributing to it if you already have one, no payments have to be made until the end of the deal term and if you do choose to make payments there are flexible payment plans. Another pro is that with most of these deals you get given a credit card, however this is also a con because people tend to think this credit card is free but now not only does the deal have to be repaid, so does any purchase made on the credit cardCons of these deals however include interest hikes if payment isn’t received on time. The interest you can expect to pay in the amount owing isn’t paid in the designated time is around 24%. Annual fees also apply if there is an outstanding balance after the plan expires and a high interest is calculated on the remaining balance.

 

3. Throughout years 11 and 12 I worked on a casual basis to save towards my goal of purchasing a car.  I have saved half the money required to purchase the car but will need to obtain a loan for the remainder (approx $10 000).  What type of loan would be suitable and what level of monthly repayments would I be looking at if I wanted to repay the amount over 5 years.  What is the current interest rate?  How would I go about obtaining the finance, or in other words, what steps do I need to take to obtain the loan?

A personal loan is the type of loan that is most suitable for the purchase of a car. The current interest rate on a personal loan at NAB is 12.99%. Using the online repayment calculator available for NAB personal loans it was found that you would need to make repayments of $227 monthly to be able to repay the initial loan in 5 years time. If the loan is paid out in the five years the amount of interest paid will be $3649. Extending this loan for even just an additional year would decrease this monthly payment, however the amount of interest payable would increase and this can be by more than $1000. The steps to getting a personal loan with NAB, and these steps will be similar with other banks and building societies, start with applying online. To be able to apply for a personal loan you must be 18, have regular income and proof of employment, financial records such as income statement and balance sheets, and you must be a permanent Australian resident. Once this online application has been lodged it will be reviewed by the bank and you will receive notification on whether the application has been approved or not. 

 

4. I have recently inherited $250 000 from a relative.  Could you please outline the investment options that are available to me and their associated levels of risk?  I have also been told that I should consider diversifying my investments but I’m not sure if I quite understand what this means.  Could you please explain in simplified terms?  What investment recommendation would you make and why?

Diversifying your investments or portfolio means that not all your money is put into one investment, and therefore the risk of losing money is reduced. The best options for you would be a term deposit and the stock market. I would advise keeping $50,000 as cash in a short-term term deposit. This money will make interest during the life of the deposit and upon maturity can be used to finance the purchase of a car, house or other asset. It is also a fairly low risk and safe investment option. The remaining $200,000 should go into a managed investment that tracks the Australian Stock Exchange (ASX) top 100, and this is available through your bank or a stockbroker. I recommend this because although it has more risk associated with it, a higher return can be made. Having such a large sum invested in managed fund will yield a great return and this is essentially what you are after. Having this diversity in your portfolio will make sure that any losses experienced will not be detrimental and risk is minimised. 

 

5. I have been told there are a number of costs associated with finance and investment.  Can you advise me of any such costs and any traps to be aware of?

Investments and financing can have hidden costs and traps that you need to be aware of. Always, always, always read the fine print and Terms and Conditions before entering into an investment or finance agreement. Some fees that you might encounter are establishment fees, which are a one off payment when you take out a loan, account keeping fees and early termination fees. There are also fees for using an ATM that isn’t your banks and these fees are usually around $2.50. 

 

6. I have been told to start saving/investing early due to the effect of compound interest.  Could you please explain this concept to me?

Compound interest is describes as 'interest on interest', meaning that interest is earned on interest paid, not only on the principal amount. Saving or investing early is a great idea; it means you will get more interest paid to you in the long term. It is also better to deposit money into the bank account more frequently than to do bigger payments less frequently. For example using the NAB Savings Calculator you can find if you initially put $1000 into a saving account and add $200 weekly, over a 10 year period and a 7.5% interest rate you would make $51,847.95 in interest. This would mean that at the end of the ten-year period the savings account that originally had $1000 would have grown to $156,847.95. However, if $800 was added monthly, only $47,456.34 in interest would be earned, making the total value of the account at the end of the 10 year period $144,456.34. Even though the same amount of money is being added to the account each month, adding $200 weekly allows the compound interest to grow quicker. 

 

7. Who is the best person to help me with finance and investment options?

A financial planner is the best person to help you decide what finance and investment options suit your needs and financial position best. Most banks have financial advisors that you can meet with and they will take you through all your options. There are also independent financial advisors but make sure they have the correct qualifications and experience. You will have to pay for these services, however the return that you will experience after advising will make this fee worthwhile. 

 

8. What is a credit rating and how does it affect me?

A credit rating is an estimate of your ability to pay back loans and fulfill financial commitments and this is based on your past commitments. You are likely to have a credit rating if you have a credit card, a loan, a mortgage, mobile phone plan or interest free store loans like those mentioned in question 2 on this page. Credit ratings determine whether you will be successful in obtaining a loan or credit card. To ensure that future loans will be approve, make sure all currents loans and debts are paid on time and in full.