6 'embarrassing' money questions answered: No judgment

They say that there’s no such thing as a stupid question, and that certainly applies to questions about money. Sometimes, though, it can feel embarrassing to ask a question, especially if it’s something that seems obvious, but you still don’t quite get it. With that in mind, here are the answers to six common 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’ve ever shopped around for a loan you’ve probably seen two different rates advertised–the interest rate, and next to it, the comparison rate. In most cases, the comparison rate is higher. Why is this the case?

The interest rate, sometimes called the advertised rate or headline rate, is the actual rate you’ll be charged on your loan balance each year.

The comparison rate, however, takes into account fees and charges on the loan as well as the interest rate. Lenders are legally required to display the comparison rate, to give you a more accurate picture of how much the loan might cost.

The comparison rate is a useful tool to help you compare loans. If you’re considering two different loans with the same advertised rate, but one has higher fees and charges, then the comparison rate will reflect that. By checking the comparison rate, you can choose the cheaper loan and potentially save money in the long run.

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

It’s a common misconception that you need a lot of money to invest. These days, it’s possible to get started with as little as $5 with micro-investing platforms such as:

• Raiz
• Pearler Micro
• Sharesies
• 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, however, is the potential for brokerage fees can eat up your returns

Let’s say you invest $500 and you pay $20 in brokerage fees ($10 to buy and another $10 to sell). You’d need your investment to increase by at least 4% to break even. Let’s say you invested $2,000 instead – 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 of each statement period. If you don’t, then you’ll be charged interest on the outstanding balance. You’ll also have to pay interest on any new purchases made after the due date until the debt is fully paid. This means you lose the benefit of any interest free periods offered, so your interest charges will keep adding up.

Credit cards have what’s known as a minimum repayment with each statement. This is the lowest amount that you can pay off without being charged late fees, or potentially having a missed payment listed on your credit report. If you can’t pay your balance off in full, then it’s important to make the minimum repayment on time.

A word of warning—if you continuously only pay the minimum payment amount, the amount of interest you owe will add up significantly. It will probably take you a very long time to clear the debt, and this can be harmful to your finances. If you are having trouble with debt, there are various ways to find help.

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. However, you’re better off talking to a financial counsellor than a financial adviser.

A financial adviser helps you plan for the future and typically provides advice on investing, superannuation, planning for retirement, estate planning and insurance. You also have to pay for their services.

Financial counsellors specialise in helping people who are having problems with debts or experiencing financial difficulty, and they do it for free. A financial counsellor helps you explore your options and negotiate with your creditors. They will help you put plans in place to manage your debts and get your finances back under control.

Visit the National Debt Helpline website or call 1800 007 007 for advice.

5. What exactly is compound interest?

Some banks in Australia pay what’s called simple interest–this is where you get a fixed interest payment over a set period of time. Others pay compound interest–this is interest earned on interest, and it can help you grow your savings at a faster rate.

Rather than waiting until the end of a fixed period for interest to be paid, you can have it calculated and paid incrementally. That can be quarterly, monthly, weekly or even daily, depending on the account you choose. Most savings accounts and some term deposits in Australia already work this way

With this option, you can see your savings grow as the principle increases and the interest payments compound. If you want to really harness the power of compound interest, find a high-interest savings account that pays compound interest, 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 how trustworthy you are to a bank or lender. It will range between 0 to 1,000 or 0 to 1,200 depending on the credit institution. The three main credit reporting bodies in Australia are Equifax, Experion and Illion.

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. Credit agencies use credit scores to sum up the information in your credit report into a single number.

For example, Equifax, 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
• Excellent: 853 to 1,200.

Experian and Illion use a range of 0 to 1,000 but also break it down into different classifications.

Your credit score can change over time, both negatively and positively. Having a good credit score will boost your ability to get a loan application approved, but does not guarantee it.

Check your credit score with Canstar