This article takes a basic and introductory look at savings interest. We’ll be looking at interest on loans and credit cards a little later.
What is Interest?
Interest is a sum of money that is earned on amounts held in banks and other financial institutions. It is expressed as a percentage of the overall savings figure. For example: if your account’s ‘interest rate’ is 3%, then you would receive 3 pounds for every 100 pounds you have in that account. That may not sound like a lot, but the more you save the more you earn. Getting the best rate of savings interest is about making your money to work for you.
There are two general types of interest: simple interest and compound interest.
Interest is subject to income tax unless you are tax exempt. Even if you are tax exempt, forms will need to be obtained from your bank for your account to reflect this.
Getting the Best Deal
Most current accounts pay very little interest. Online savings accounts and ISAs generally pay a little more. However, the highest rates of interest are only available from bonds.
The general rule is that the higher the rate of interest, the more numerous or onerous the catches. For example: high interest current accounts require a deposit of at least 1000 pounds per month, online savers provide limited access to your cash when you’re out and about, and most bonds require you to lock your money away for years and charge hefty fines if you withdraw before the end of the agreed period (before it ‘matures’). Finding the right interest rate is, therefore, something of a balancing act: you want the highest rate of interest possible with the fewest restrictions.
- Simple interest is applied only to the original figure.
- Compound interest is applied both to the original figure AND the interest that has accrued - in other words, interest on top of interest.
Interest is subject to income tax unless you are tax exempt. Even if you are tax exempt, forms will need to be obtained from your bank for your account to reflect this.
Getting the Best Deal
Most current accounts pay very little interest. Online savings accounts and ISAs generally pay a little more. However, the highest rates of interest are only available from bonds.
The general rule is that the higher the rate of interest, the more numerous or onerous the catches. For example: high interest current accounts require a deposit of at least 1000 pounds per month, online savers provide limited access to your cash when you’re out and about, and most bonds require you to lock your money away for years and charge hefty fines if you withdraw before the end of the agreed period (before it ‘matures’). Finding the right interest rate is, therefore, something of a balancing act: you want the highest rate of interest possible with the fewest restrictions.
The most common restrictions are on withdrawals, which can sometimes include interest penalties for early withdrawals. However, some accounts also restrict the number of deposits you can make as well, meaning that to get the best rates of interest you may be led to lock away more of your money than you can reasonably afford to.
Millions of people all over the country are ignorant of the often pitiful interest rates that they are receiving from their current accounts and savings accounts. Many still believe that loyalty pays, but this is no longer the case. If your bank isn’t doing you any favours, it’s time to ditch it in favour of a new account. It is now easier than ever to find the right account for you given the number of comparison websites that are popping up all over the place.
Perks
A lot of accounts feature a bonus interest period for new customers (often for the first 3, 6 or 12 months). If you elect to open such an account, it’s worth making a note on your calendar of the date when the bonus will end.
Millions of people all over the country are ignorant of the often pitiful interest rates that they are receiving from their current accounts and savings accounts. Many still believe that loyalty pays, but this is no longer the case. If your bank isn’t doing you any favours, it’s time to ditch it in favour of a new account. It is now easier than ever to find the right account for you given the number of comparison websites that are popping up all over the place.
Perks
A lot of accounts feature a bonus interest period for new customers (often for the first 3, 6 or 12 months). If you elect to open such an account, it’s worth making a note on your calendar of the date when the bonus will end.
Some banks and financial institutions reward new customers with one-off cash incentives (some of which can be over 100 pounds) for opening an account and transferring direct debits to it. If such an offer catches your eye, it is very important to make sure that you will be able to satisfy the offer's criteria, and that the interest rate isn't so low/charges aren't so high as to make the cash incentive irrelevant.
Be aware that some accounts are set to pay interest into a separate elected account. This means that interest on these accounts cannot be compounded (see above).
Conclusion
Never sign up for anything without knowing what you're getting yourself into, and you should always be alert around deals that seem too good to be true. It can take time to shop around. For many this can seem like a daunting process, but it is well worth the effort.
===========
Opening a lot of different bank accounts can be injurious to your credit rating. Once you have left one account, be sure to close it. A long-standing bank account can also support your credit rating, so it is worth keeping at least one old account open, even if it’s left holding only a small amount.
===========
Opening a lot of different bank accounts can be injurious to your credit rating. Once you have left one account, be sure to close it. A long-standing bank account can also support your credit rating, so it is worth keeping at least one old account open, even if it’s left holding only a small amount.
No comments:
Post a Comment