Ways to improve the return on your savings

If you haven't checked the interest rate on your savings account recently you are almost certainly losing money. Banks and building societies have been cutting interest rates on savings as much and as often as they can. So most savers are losing their purchasing their power as their savings fail to grow in line with inflation.

The most recent numbers showed inflation as measured by the consumer price index (CPI) running at 3.5%. But the average rate paid on an instant-access account is just 0.86%. So even before you take tax into account, you're losing more than 2.5% a year in real terms (ie after taking inflation into account).

Even more shocking are the rates on notice accounts. Usually these are higher than the rates on instant access accounts. You get extra interest as a reward for locking your money away for three or six months. Not so this year. 40 notice accounts are paying less than 0.5%. The Halifax's Extra Income Saver account is paying a mere 0.13% on up to £10,000 at 60-days notice, according to the FT. It's a classic example of a financial product doing precisely the opposite of what it claims to do.

So what can you do to make sure that your money grows rather than shrinks every year? You need to find an account that pays enough interest to beat inflation, even after you've paid tax on your interest. So a basic-rate taxpayer needs a gross interest rate of 4.38%, while a higher rate taxpayer needs their money to be earning 5.83%. If you opt for an Isa then you only need a rate of 3.5% or above, as your money won't be taxed.
Are Isas the answer?

Surely then, an Isa is the option to go for? Well, you should definitely always use your Isa allowance. Any legal opportunity to dodge tax should be grasped with both hands. But this year there aren't any Isa interest rates that really impress.

The best short-term fixed rates are 3.5%. So you'd have to lock up your money for at least three years to beat inflation – Skipton Building Society pay 3.75% on their three-year fixed-rate Isa. But once that money is in an Isa it is protected from tax for life unless you withdraw it. So even though Isa interest rates are pretty rubbish this year it's still worth using your allowance.
Make the most of current accounts

The only bank accounts offering really good rates of return just now are current accounts. Alliance & Leicester's Premier Direct Current Account pays 5% interest on balances up to £2,500, as does its parent company Santander. Meanwhile Halifax pays £5 a month to holders of its Ultimate Reward Current Account.

To get these rates you need to pay a regular sum into the accounts - £1,000 with Santander and Halifax, and £500 with Alliance & Leicester. And you can't earn 5% on both a Santander and an Alliance & Leicester account. If you have both accounts in your name one will earn 5%, and the other 1%. But you could get round this by putting one account in your spouse's name.

Enjoying this article? Sign up for our free weekly email, MoneyWeek Saver, to receive free weekly personal finance tips and insight direct to your inbox from our expert, Ruth Jackson. Sign up to MoneyWeek Saver here

The easiest way to make sure you meet the funding requirements of the accounts is to set up a direct debit moving money between them. So have £1,000 automatically transferred from Santander to Halifax at the same time as you have £1,000 transferred from Halifax to Santander. The banks have confirmed that the regular income doesn't have to come from an employer, so this arrangement is acceptable, reports Ali Hussain in The Sunday Times.

So if you have a £3,500 lump sum and you place £2,500 in the Santander account and £1,000 in the Halifax account (and make sure you set up the regular transfers between the two) then you would earn £185 gross a year. Whereas if you had placed the money in the best one-year bond – the Post Office pays 3.3% - then you would have earned £116 gross. The difference might not sound like much, but it comes with very little effort.
What to do with larger amounts

If you have a large sum that you want to save in a low-risk account then the best account that I can find is Investec's High 5 Account. This account's interest rate is re-calculated each week, as it pays the average of the five highest paying savings accounts published in the best-buy tables of the Moneyfacts website. It is currently paying 3.16%.

The catch is that the minimum deposit is £25,000. You also have to give three months' notice to withdraw your cash. But it's worth it for the peace of mind of knowing your money is always getting a good rate.

To keep your risk to a minimum, only invest a maximum of £50,000 in the account so that you are completely covered by the Financial Services Compensation Scheme (FSCS). If you need a home for more than £50,000 then put the first £50,000 in the Investec High 5 Account, then work your way down the best buy tables in £50,000 chunks. Just make sure that the bank or building society is covered by the FSCS. So if the bank is foreign double-check its guarantee system. Also make sure that you don't invest with two companies that share a banking licence, as then you would only be covered for the first £50,000. You can check which banks share licences here.
Offset your mortgage

If you have a large amount of savings and a mortgage, it may be worth getting an offset mortgage. With an offset, any savings you have are placed in a savings account which is linked to your mortgage. The savings don't earn any interest. But the balance of your savings account is deducted from your home loan.

So if you have a £200,000 mortgage and £25,000 in an offset account, then your mortgage interest payments would be worked out on the basis that the mortgage was only £175,000. If you took out the First Direct offset lifetime tracker at 3.59%, that would save you £897.50 in interest a year.

So don't despair. Savings rates may be low. But there are ways to improve the return you are getting.

Credit Check

Credit Check

There are three credit reference agencies in the UK, Callcredit, Equifax and Experian. When you apply for credit potential lenders can conduct a credit search with these companies to determine if you are credit-worthy or not.

These credit reporting companies keep detailed information relating to your credit history which is supplied on a monthly basis by all those you have credit accounts with. For example, what loans and credit accounts you have, whether you have kept up to date with payments or defaulted on accounts and if you have any county court judgments or bankruptcies against you.

They also record your date of birth, name and address, any previous names and addresses and any joint applications for credit that you may have. All the information on your credit file is kept for a period of six years.

When lenders conduct a credit search they will use the information in your credit report to determine whether to accept your application for credit, in other words they will assess how much of a risk you are.

Different lenders have different criteria for offering credit so you could be rejected by one lender but accepted by another. However, don't be tempted to apply to too many lenders in a short space of time as all credit searchers are recorded and too many credit searches will worsen your credit score.

What is a credit score?

A credit score is a mathematical calculation based on the information contained in your credit report and is an indication of how much of a risk you are to potential lenders. Even if your credit score isn't particularly good, a lender may still decide to offer you credit but at a higher interest rate.

How can you improve your credit rating?

If you are not on the electoral roll then it is unlikely you will be able to get any credit at all so make sure that you are and that you complete the forms each and every time they are sent out.

By obtaining a copy of your credit file you will be able to check to make sure it is accurate and if it is not, to have any errors corrected and you will also have a good idea as to what you need to deal with to improve your rating.

At the very least:

- Make sure that all your payments are made on time every time as each time you are late with a payment or miss a payment your credit rating will be affected.

- If you have several credit cards with payments to make at different times of the month it might be a good idea to consider setting up a direct debit for the minimum amount each month so that you don't forget and then try to pay more by other means each month.

- If you have savings then consider using your savings to pay off any debts you have, particularly those with high interest rates as the overall amount of debt you have influences your credit rating.

It's important to remember that if you have a substantial amount of debt it is never too late to take steps to sort it out. If you are worried seek advice. No matter how poor your credit rating is, it can always be improved.

Best Place To Invest Money

The best place to invest money really depends on the individual doing the investing. To determine which place to park your funds depends on how much risk you can handle and what type of time frame you are working with. This article will describe a few low risk options for investing funds along with a few high risk options for investing.

If someone asked me what the best place to invest money was, I would present them with a few different investment strategies and explain the expected return and the risk of each of those investments.

For someone who is very risk averse (one who avoids risk), I would recommend a fixed income security or a money market account. A money market account is similar to a normal bank account except it pays a higher interest rate. ING Direct offers money market accounts and sometimes offers a sign-up bonus. The interest rate from these types of accounts are normally around the rate of inflation.

For someone who can accept a moderate amount of risk, they should consider an index mutual fund. An example of this would be the Vanguard 500 mutual fund. This fund has extremely low fees and is a basic copy of the S&P 500. The reason this carries moderate risk is because it is a diverse mix of fairly conservative stocks. This specific fund has an average annual yield since inception of 10 percent.

For someone who can accept a high risk, they should consider trading individual stocks. This option takes a great deal of research and a strong heart. Stocks can jump or crash 20 percent or more on a single day. If you are not careful it can turn into a form of gambling. There are many online stock trading brokers to choose from (Etrade, Charles Schwab, Trade King, Sharebuilder.com). The key to success in stock trading is research, have a strategy and don't emotionally invested in a certain company.

If risk doesn't matter at all, there is also the Forex market. This is the foreign currency exchange. In this type of trading, you can open an account with a broker who will provide you a margin of up to 200 times your original investment. Small swings in currency rates can lead to huge profits, but it can also wipe out your entire investment in a matter of seconds. For a comprehensive guide to investing in the Forex markets see www.babypips.com. It should be noted that most traders recommend using a practice account for at least six months before deciding if the forex market is right for you. To sign up for a practice account see www.forex.com.

The most important thing to think about before you begin trading is what you can afford to lose. If you are working with funds that your family will need in the near future, stick to something safe. It will not provide the return of stocks, but it will also not wipe out your family's quality of life.

APR ? AER ? EAR ?

APR ? AER ? EAR ?
What do the terms APR, AER and EAR mean?

Do you often look at the advertisements for loans, mortgages and savings and wonder what APR, AER and EAR actually mean? Well you're certainly not alone. Even banking staff can get confused!

The Financial Services Authority specifies the exact mathematics behind these calculations and polices their use. All financial institutions have to stick to the exact calculations and the FSA lays down rules as to when and how the figures have to be disclosed. There are no exclusions! But it's no good if the public don't understand what the terms mean.

So lets do our bit to lift the mists of misunderstanding!
APR stands for "annual percentage rate"

It is used to describe the true cost of the money borrowed on mortgages, loans, and credit cards.

The calculation for APR takes into account the basic interest rate, when it is charged (i.e. daily, weekly, monthly or annually), all initial fees and any other costs you have to pay.
As all lenders calculate APR exactly the same way, it enables you to make direct cost comparisons between lending products.

So if one building society is offering you a mortgage at 4.8% plus an arrangement fee of £600 and a bank is offering you an interest rate of 5.2% with a £150 fee, then the APR figures will show you which of the two mortgages is cheapest.
There are then two further expressions that use APR.

When you see X% APR variable , this means that the cost is currently X% but the interest rate is not fixed and from time to time the interest rate is likely to vary (up or down).

The second variant is X% APR Typical variable. You'll frequently see this _expression in promotions for loans. It means that the lender is not being totally specific about the interest rate you will be charged as their rates vary, usually in response to your personal credit rating and the amount of money you want to borrow.
Therefore X% APR Typical variable is used to give you a general idea of what interest rate you can expect to pay.

The addition of the word "Typical" means that at least 66% of their approved applications are offered that rate or cheaper. Then when a loan offer is confirmed to you, the paperwork will disclose the actual APR or APR variable you are being offered.
Now lets look at EAR.

EAR is the abbreviation for "equivalent annual rate". It's used to illustrate the full percentage cost of overdrafts and any type of account that can be in credit and also go overdrawn.

The calculation shows you the true cost if you use the overdraft facility. In common with the APR calculation, EAR takes account of the basic rate of interest and when the interest is charged to the account plus any additional charges.
So in most respects EAR and APR achieve the same thing -

it's just that APR applies to a pure lending product whereas EAR applies to a product, such as a bank current account, that can be in credit or go overdrawn.

By the way, the calculations for both EAR and APR always exclude any Payment Protection Insurance you've bought to ensure the monthly repayments are maintained if you are off work due to accident, sickness or unemployment. That's because this insurance is always optional and is not a condition of the lending.
AER is totally different.

It's only used in relation to savings and interest based investments. It's all about the rate of interest you'll receive on your money.
AER means "annual equivalent rate".

It shows the true rate of interest you will have received by the end of the year taking into account the regularity of which interest is added to the account (as the payment frequency has a compounding affect on the amount of interest you receive). The AER calculation also removes the affect of any promotional offer that disappear after a few months - a popular trick used by banks and other institutions to boost their savings products to the top of the Best Buy tables.

It's not easy to remember all this but we hope we've shed some light on some of the jargon you're faced with!