4.09 Credit cards and savings accounts

Most people tend to hold multiple accounts including an Everyday Banking account and Savings bank account.

An Everyday Banking account is the account where your salary is deposited and where you make most of your payments from, usually using your EFTPOS card. The interest rate applied to this sort of account is extremely low and you therefore don't earn any interest on the money you have there.

A Savings bank account is an account that you set aside just to deposit money you wish to save and grow. These accounts earn a higher interest rate than your everyday account and are therefore better for saving.

Savings Calculators

Most banks provide customers with a range of interactive calculators to help decide which account to use.

A savings calculator allows you to investigate how much you would need to deposit, and how often, to reach a particular savings goal you might have.

The Commonwealth Bank has a Savings Calculator that you can use to plan your savings.

Worked example

example 1

How long would it take you to save $\$10000$$10000 if you can afford to put aside $\$100$$100 a month and you can earn interest of $3.5%$3.5% per annum?

Follow the link given above and experiment with using the calculator. For this example, you should calculate that it would take $7$7 years and $4$4 months to reach your goal.

What could you do to speed this up?

Understanding your account statement

Below is the account statement for a sample bank account provided by a bank to help customers understand their statements.

Typically you'll receive a statement like this once a month or once a quarter detailing withdrawals (purchases, fees...) and credits (payments into your account).

Notice that this account is overdrawn, the end balance is a negative amount, meaning that this individual spent more money than they have in their account and they will have to pay penalty fees to make up for this.

Understanding your Savings Account Statement

Below is an account statement for a savings account that this business makes available for their clients to see.

You can see that regular deposits of $\$250$$250 are made and interest is accrued and paid each month. Bonus interest has also been added for the months when no withdrawals where made. Banks often offer this an incentive to avoid withdrawing.

Practice questions

Question 1

Question 2

Credit Accounts

 

 

Credit cards are everywhere in today's society and used all around the world as a method of payment. They allow people to buy goods and services that may be too expensive to buy in a one-off purchase otherwise. Further, with online shopping becoming more common, you can also buy items from sellers in another country and pay easily.

 

Credit cards are a form of loan in the form of continuous line of credit where consumers are allowed to have a continuing balance of debt if they cannot repay the full balance.

The level of debt among teenagers is rising at an alarming rate. It is important to understand how credit cards work and how interest is calculated to avoiding ending up in debt and repaying a huge amount of money!

Calculating interest

The interest rate is normally written as a rate per annum however, the interest may actually be calculated daily, weekly, monthly etc. So how is the equivalent interest rate calculated knowing the rate being charged per day? Since there are $365$365 days in a regular year, divide the annual interest rate by $365$365. Conversely, to go from a daily rate to an annual rate, multiply by $365$365. The number you multiply or divide by will change depending on what units you are converting to and from.

Worked examples

Example 2

Calculate the equivalent annual rate of interest when the monthly rate is $0.2%$0.2%. Write your answer as a percentage to $2$2 decimal places.

Think: There are $12$12 months in a year.

Do: $12\times0.2=2.4%$12×0.2=2.4% p.a.

Example 3

The opening balance on a credit card is $\$1600$$1600 and purchases of $\$631$$631 and repayments of $\$419$$419 are made during the month. If the credit card company requires a minimum payment of $8%$8% of the closing balance, find the minimum payment required. Write your answer to the nearest cent.

Think: Calculate the balance owing before calculating the minimum payment.

Do:

Balance: $1600+631-419=\$1812$1600+631−419=$1812

Minimum payment: $1812\times8%=\$144.96$1812×8%=$144.96

 

Practice question

Question 3

Interest on credit card debt compounds so debt can very quickly increase is repayments are not made.

Account fees and charges

When you start earning or saving money you need to decide how you will store it. Having and using a bank account costs money. Fees and charges need to be paid regularly to the bank for holding an account with them.

Account Service Fee: The most common fee an account holder will usually pay to the bank to maintain the account. This is typically paid on a monthly basis.

Transaction fee:  a small fee is often charged every time a transaction is made, such as withdrawing or depositing money. Some banks charge the same general transaction fee for all types of transactions. Others prefer to charge separate transaction fees for transactions that occur at an ATM (Automatic Teller Machine), on the phone to the bank, at a local branch, or on the internet.

Late payment penalty: charged if you don't pay your regular fees on time.

Overdrawn account fee: charged if you withdraw more money from your account than there actually is, then this means the bank is forced to lend you extra money that it did not expect to. Your balance will drop below zero and you will be charged a fee. If you use a credit card, a similar over-limit penalty can be charged if you spend over the agreed limit. 

Dishonour fee: If you have set up periodic payments to an individual or business who you pay regularly, or write them a cheque, the bank will charge a if your account has insufficient funds. 

Practice questions

Question 4