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When opening an account (especially a savings account), or if you are considering borrowing money as a loan or on a credit card, the main thing to consider should be the rate of interest.

Put simply, the rate of interest is a percentage you can earn on money you have (in an account) or a percentage you must pay back on money you don't have (overdraft, loan or credit card).

For example:

Money you have (earning interest)

If you have a current account that pays interest at 5% and you have 100 in your account at the end of the year you will earn 5 interest. To complicate matters, if you earn enough to be taxed on your income, you also earn enough to be taxed on your savings. You are taxed at the basic rate of tax (20%).

Usually the bank will do this and it will be shown as net interest.

If you do not earn enough to pay the basic rate of tax (5,435) you should not be taxed on savings. This is why tax-free accounts known ISAs are a good way to save.

Money you don't have (paying interest)

If you have a loan that charges you interest at 10% per year and you have borrowed 100 you will owe 10 every year on that loan as well as the loan amount.

In conclusion, when you are saving money you want the highest interest rate and when borrowing money you want the lowest interest rate.

This page was updated on 15 July, 2008


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