Answers to 6 money questions you might be too embarrassed to ask

They say that there’s no such thing as a stupid question and that certainly applies to any questions about money, but sometimes it doesn’t feel like that. You may think it’s something simple and don’t want to come across as silly for not knowing the answer. So to save you the discomfort, here are the answers to six money questions you might be too embarrassed to ask – even though you shouldn’t be.

1. What’s the difference between interest rates and comparison rates?

If you have ever shopped around for a loan you have probably seen two different rates advertised – the interest rate and the comparison rate. You may also have noticed that the comparison rate is generally higher than the interest rate. But what is the difference between the two?

The interest rate – sometimes referred to as the advertised rate or the headline rate – is the rate you’ll be charged on your loan balance each year. The comparison rate, however, takes into account most of the fees and charges on the loan as well as the interest rate. That’s why in most cases the comparison rate is higher than the interest rate.

The comparison rate gives you a better idea of the true cost of the loan. It’s also a useful tool to help you compare different loans. Two loans might have the same advertised rate, for example, so on the surface it appears they cost the same. But if the fees and charges on one of the loans are higher than those on the other one it will cost you more in the long run. The comparison rate will reflect that. That’s why it’s important to look at the comparison rate when you are shopping around for a loan.

2. How much money do I need to start investing?

It’s a common misconception that you need a lot of money to invest but these days it’s possible to get started with as little as $5 with micro-investing platforms such as Raiz, Pearler Micro and Sharesies or $50 with CommSec Pocket.

If you want to invest in shares or exchange-traded funds (ETFs) you’ll need at least $500 plus the cost of brokerage to get started. One of the downsides of investing with a smaller amount is the impact the brokerage fee has on your returns. Let’s say you invest $500 and the brokerage fee is $10, you’d need your investment to increase by at least 4% to break even (this is based on paying $10 to both buy and sell your investment). Now, if you start with $2,000 the value of your investment would only need to go up by 1% for you to break even.

3. Is it bad if I don’t pay off my credit card debt in full every month?

Ideally, you should be paying your credit card debt in full by the due date. If you don’t, then you will be charged interest on the outstanding balance. You’ll also have to pay interest on any new purchases you make after the due date until you pay off the debt in full, effectively losing the benefit of the interest-free period. So it certainly pays to pay off your outstanding balance as soon as you can to avoid the interest charges adding up.

If you can’t pay it off in full you should, at the very least, make the minimum repayment on time. This can help you avoid any late fees that may apply and you won’t have to worry about a missed payment being listed on your credit report. (A lender can only report a missed payment if you are more than 14 days late.)

A word of warning, though. If you continuously only pay the minimum payment amount the interest costs will add up significantly and it will take you a very long time to clear the debt so this is not something you want to do long term. If you are having trouble with debt it’s worth seeking help (see next point).

4. I’m in over my head with debt – can a financial adviser help me?

If you’re struggling with debt and not sure how to get on top of things it’s important to ask for help but you will probably be better off talking to a financial counsellor than a financial adviser.

A financial adviser can help you plan for your future and typically provide advice on things such as investing, superannuation, planning for retirement, estate planning and insurance and you have to pay for the service.

Financial counsellors specialise in helping people who are having problems with debts or experiencing financial difficulty and they do it for free. According to the National Debt Helpline, a financial counsellor can help you explore your options, negotiate with your creditors, put plans in place to manage your debts and get your finances back under control.  You can visit the National Debt Helpline website or call 1800 007 007 if you’d like advice.

5. What exactly is compound interest?

You’ve probably heard the words compound interest thrown around. You may also have heard that Albert Einstein described compound interest as the eighth wonder of the world. But what is it? Simply speaking, it is interest earned on interest and it can help you grow your savings at a faster rate.

In short, compound interest is a process by which you earn interest on top of any interest already earned on your savings.  Rather than waiting until the end of a fixed period for interest to be paid, you can have it calculated and paid incrementally, say quarterly, monthly, weekly or even daily, depending on the particular account you choose.

If you choose this option, then you can see your savings grow as the principle increases and the interest payments compound. Most savings accounts and some term deposits in Australia work this way, and if you want to really harness the power of compound interest you should start saving as soon as possible and regularly top up your savings.

6. What is a credit score and why should I care about it?

Your credit score, or credit rating, is a number that represents your creditworthiness. It essentially sums up the information in your credit report into a single number. The number can range from 0 to 1,000 or 0 to 1,200 depending on the credit reporting agency. The higher the score the better.

For example, Equifax – one of the three main credit reporting agencies in Australia – uses a range of 1 to 1,200 but breaks it down to the following bands: below average (0 to 459), average (460 to 660), good (661 to 734), very good (735 to 852), and excellent (853 to 1,200).

The other two credit reporting bodies – Experian and Illion – use a range of 0 to 1,000 but also break it down into different classifications.

Your credit score is important because it’s one of the factors lenders may use when deciding whether to approve your credit or lend you money. Having a good credit score will boost your chances of getting your loan application approved but keep in mind it’s not the only thing that lenders will take into consideration when assessing your loan application. It’s also worth noting that your credit score can change over time.

You can check your credit score for free with Canstar or by going directly to the credit reporting bodies.