Australians have a shockingly low level of basic financial literacy, according to a new survey.
ME bank asked basic banking questions of 1500 Australians in June this year and found that 60 per cent failed their quiz.
Worryingly, most people who took the test had no clue about home loan comparison rates and didn’t know whether to put a car purchase on their home loan or to get a separate personal loan.
Most also didn’t realise that paying the minimum off their credit card was a terrible idea, or why a personal loan is often a far better deal than a credit card.
A substantial number also didn’t understand the concept of compound interest, or that reducing the length of a loan reduces the amount of interest paid.
Nic Emery, head of deposits and transactional banking at ME, said he feared many banking customers could be making poor decisions because of this lack of knowledge.
“Some Aussies fail to educate themselves because they find banking dull and complex and think they know best, while others find working with numbers difficult and put their head in the sand,” he said.
“But like it or not, banking is part our daily lives and understanding the basics is a life-skill, like being able to cook and catch public transport.
“A few good rules of thumb to start with are to review your banking products annually like you might an electricity or insurance contract, and be prepared to switch if you’re not getting a good deal. It’s easy once you know how.”
The 10 basic money facts you need to know:
1. Mortgage insurance protects the bank, not you (80 per cent got it wrong)
2. A home loan ‘comparison rate’ is the interest rate when fees and charges are taken into account (74 per cent got it wrong)
3. Adding a car to your home loan is likely to cost you more than taking out a separate personal loan (74 per cent got it wrong)
4. It’s a bad idea to pay just the credit card minimum. For example, if you owe $3000 at 15 per cent interest, it will take you around 18 years to repay if you only pay the minimum each month (73 per cent got it wrong)
5. Your ability to earn an income will be your single most valuable financial asset over your lifetime – not your house or your relationship (64 per cent got it wrong)
6. Personal loans are better than credit cards because they have lower interests; and their interest rates are set high enough that you will pay it off over a set period (58 per cent got it wrong)
7. Banks and financial institutions directly set the interest rates you pay and earn, not the Reserve Bank (57 per cent got it wrong)
8. A good way to illustrate compound interest is that if you deposited $100 in a bank account that pays 10 per cent interest, in five years’ time you would have more than $150. (42 per cent got it wrong, with many saying it would be exactly $150)
9. The amount of interest you pay on a home loan is impacted by three key things: your credit rating; whether it is a secured or unsecured; and how long you take to repay (41 per cent got it wrong)
10. If you pay your mortgage fortnightly instead of monthly you will pay less interest overall (32 per cent got it wrong)