Important Banking Terminology Everyone Should Know

If you've ever thought you'd like to be better with your money, the first step should be improving your financial literacy. Understanding important banking terms and concepts is critical to making informed financial decisions. As you manage your money and financial accounts, ensure you have at least basic knowledge of key banking terminology.

Below we've helped define some key terminology commonly used in banking that's important to understand.

Types of Accounts

• • Checking accounts: A checking account safely holds your money for short-term needs and day-to-day expenses. Consumer checking accounts generally allow you to deposit or withdraw funds as often per month as you want.¹ A checking account may come with a checkbook to write paper checks and a debit card to withdraw funds at an ATM or make purchases anywhere debit cards are accepted.
• • Savings accounts: A savings account is a type of bank account designed for saving money you don't plan to spend right away. High yield savings accounts offer even more competitive interest rates on your deposited funds. With a savings account, you can make withdrawals and access the money as needed, but the bank pays you compounding interestto keep your funds in your account.These interest-bearing accounts are intended to keep your funds safe for longer terms. Find more savings terms in this helpful savings terms video.
• • Certificates of deposit: A certificate of deposit (CD) is a time-bound savings account that offers high returns at low risk. With a traditional CD account, funds are locked away until a specific future date.² In return, you'll typically earn a higher interest rate than with a regular savings account. Interest rates are often fixed, unless you have a bump-up CD that allows a one-time increase on the interest rate affixed to the CD. With a traditional CD, you may pay a penalty if you need to pull out your funds early, unless you have a no-penalty CD. Consider a CD ladder to access funds periodically while locking in a higher interest rate with a CD.
• • Money market accounts: Money market accounts are like a hybrid of a checking and savings account. You'll generally get interest rates similar to those of a savings account, but you also may have a debit card and checkbook for withdrawals.
• • Joint accounts: A joint account is a shared account to which two or more people have full access.³ Joint account holders can withdraw money or close the account.
• • Tax-advantaged accounts: Tax-advantaged accounts are special accounts designed for saving up for retirement, education, healthcare and other limited purposes. These accounts may offer the opportunity to save on taxes when used as designed.
• • Safe deposit box: While not exactly a bank account, many savvy banking customers choose to open a safe deposit box at a local bank. Sometimes called a safety deposit box, these allow you to store anything you want safely (like a legal will) inside a fire-protected vault in a box where only you have the key.

Interest and Fees

• • Interest rate: Interest is a fee for borrowing money. You can earn interest from a deposit account, or you'll pay interest when taking out a loan or credit card, for example. Interest rates may be measured in several ways and may change frequently, so pay close attention to how interest works for your accounts.
• • Compound interest: Compound interest is a fancy term for interest earned on interest. For example, if you earn $100 in interest in your bank account this year, that $100 will earn interest next year.
• • Annual percentage rate: Annual percentage rate (APR) is a rate used primarily for borrowing and loan accounts. APR is an all-in rate that may include other charges, such as origination fees.⁴ If you apply for a credit card with a 20% APR, for example, you'll have to pay an additional 20% on the remaining balance after your statement due date.
• • Annual percentage yield: Annual percentage yield (APY) is a rate used primarily for savings and other deposit accounts. APY is the annual rate you'll earn, including compound interest, and it helps you make an apples-to-apples comparison of different accounts.⁵ For example, you'll earn more in interest from an account offering a 1.5% APY than an account offering a 0.75% APY.
• • Minimum balance fee: A minimum balance fee is a charge for going below a specific minimum balance defined by your bank documents. For example, if your bank requires a $50 minimum balance and you only have $30 in your account, you can be charged a minimum balance fee. Many banks use your daily ending balance or average daily balance to determine whether to charge a fee for that month.
• • Overdraft fee: You may be charged a fee if you spend more than your account balance. For example, if you only have $100 in an account but charge $150 to pay a bill, you may be charged an overdraft fee. You can avoid overdraft fees if you never attempt to spend or withdraw more than your account balance.
• • Service charges: Service charges are one-time fees for specific services you need, such as a fee for an expedited debit card replacement or an official check.
• • Monthly service fee: Some accounts require a monthly service charge to keep the account open.⁶ Consumers can usually avoid these charges by meeting minimum balance or other activity requirements. The best accounts have no monthly charges, regardless of your balance and account activity.
• • Withdrawal fee: Less common than other fees, some accounts require a fee to take money out of an account or for excess withdrawals over a specified limit.

Credit and Loans

• • Credit score: Your credit score is a number that tells lenders how likely you are to pay back the funds you borrow.⁷ It's based on all the information included in your credit report.
• • Credit report: A credit report summarizes your borrowing activities and other information that may be important to lenders, such as your history of bankruptcies or legal judgments against you.⁸
• • Credit card: Credit cards are open-ended loans enabling you to borrow up to the credit limit.⁹ Open-ended loans don't have a definite end date, and they can be utilized repeatedly. You can use a credit card to make a purchase in stores or online and have the option to pay back the lender right away to avoid interest or over time with interest charges.
• • Collateral: Collateral is something of value (such as your home or car) that's attached to a loan to "secure it." If the loan isn't paid as agreed, the bank can seize the collateral to repay the loan.¹⁰ This is most common for vehicle loans and home loans.
• • Personal loan: A personal loan is a loan to an individual to cover personal expenses. These loans typically require a fixed monthly payment for the loan term. Unsecured loans are offered without any required collateral, while secured loans must be backed with something of value.
• • Mortgage loan: A mortgage is a type of loan used to buy a property, such as a home or a condo. Terms often last up to 30 years. If you don't repay your loan as agreed, you could lose the property through foreclosure.
• • Principal: Principal is the initial amount borrowed with a new loan. The term also signifies the portion of a loan payment that lowers your outstanding loan balance, as opposed to the portion used to pay the current month's financing charges.¹¹ For example, if someone takes out a $100,000 mortgage, the principal would be $100,000. If that person had paid $15,000 on the principal over a five-year period, the current principal amount would be $75,000.
• • Amortization: Amortization is a method of calculating loan interest and payments over a specified period.¹² For nearly any loan, you can use an amortization table or calculator to see how your loan payments are divided between interest and principal until the loan is paid off.

Online and Mobile Banking

• • Online banking: Online banking lets you view account balances and transactions through your computer.¹³ With online banking, you can enter transactions, such as transfers between accounts, and take care of many simple self-service banking needs.
• • Mobile banking: Mobile banking is a version of online banking made for your smartphone, such as an iPhone or Android device.
• • Bill pay: Bill pay is a banking tool you can use to pay bills. Depending on your bank, you may be able to pay companies using direct online payments. Where electronic funds transfers are unavailable, the bill pay provider sends a paper check to ensure your funds are received on time.
• • Mobile deposit: Mobile deposit is a mobile banking feature where you can take a picture of a check with your phone to deposit the funds into your bank account. There's no need to waste gas or take the time to drop a check off at the bank when you can deposit it with your phone.
• • Electronic funds transfer: Electronic funds transfers (EFTs) are a digital movement of funds between two bank accounts. In the United States, most EFT transactions are processed using the Federal Reserve's Automated Clearing House (ACH) system.

Fraud and Security

• • Phishing: This term, pronounced like "fishing," signifies attempts by cybercriminals to lure victims into clicking a link leading to a malicious webpage or to trick victims into sending funds.¹⁴
• • Identity theft: With identity theft, a criminal gains access to your personal information and uses it to open accounts or transact under your name fraudulently.
• • Two-factor authentication: Two-factor authentication, a form of multifactor authentication (MFA), is an important security feature to keep bad guys out of your accounts. With two-factor authentication, you must typically enter a code from a text message, email or code generator to access your account. Criminals can't log in without that code, which only you can access.
• • Encryption: Encryption is a digital process of scrambling internet data before it's transmitted to another computer, and only the receiving computer can unscramble the data. Encryption prevents hackers and other cybercriminals from accessing private data while in transit between systems and networks.
• • FDIC: The Federal Deposit Insurance Corporation (FDIC) is a government agency that provides insurance for bank account deposits in the United States. If a member bank goes out of business, the FDIC guarantees you'll get your money back, up to $250,000 per account holder ownership category, per FDIC-insured bank. You can enjoy up to $500,000 in FDIC coverage for joint accounts.

Payments and Transfers

• • Routing number: A routing number is a 10-digit number associated with a financial institution. Each bank has a unique routing number used when sending funds between banks in the U.S.¹⁵
• • Cashier's check: A cashier's check is written from the bank rather than a personal bank account. These checks are guaranteed funds and may be used in real estate or when sending large sums. You may hear this referred to as an official check.
• • Money order: A money order is an official check with a lower limit than a cashier's check. You may purchase a money order at a bank, post office or grocery store. Money orders typically have a limit of around $1,000, depending on the issuer.
• • Stop payment: A stop payment is a banking service where you can tell your bank that a check or other payment currently in process should not be allowed to complete. If you have a dispute with a business and don't want a check cashed, for example, you may use a stop payment to keep funds in your account.
• • Automated Clearing House: The Automated Clearing House (ACH) is a system operated by the Federal Reserve. ACH payments allow you to send funds directly between accounts at different banks.
• • Wire transfers: Wire transfers are high-speed payments between banks, including international ones. You usually can't cancel or reverse a wire transfer, so it's important to pay attention to the details and to never send one unless you're certain the receiving account information is accurate.
• • Direct deposit: Direct deposit is an industry term for sending funds directly to a bank account, such as your paychecks from work. Direct deposit in the United States relies on the ACH system.
• • Monthly bank statement: A monthly bank statement is a paper or digital document detailing all monthly transactions and account activity for a bank account.
• • Available vs. current balance: Current balance indicates funds in your account, while the available balance is limited to funds you can withdraw.

Manage Your Money With Confidence

From ACH to withdrawal, there's a lot of jargon in the banking and finance industries. But when you cut through the sometimes-confusing banking terminology, you can confidently move forward, knowing you're making the best financial decisions.

Keep in mind that financial literacy isn't a one-time event. To truly master your money, continue reading, watching and listening to improve your financial education for years to come.

 

Eric Rosenberg is a financial writer, speaker and consultant based in Ventura, California. He holds an undergraduate finance degree and an MBA in finance. He is an expert in topics including banking, credit cards, investing, cryptocurrency, insurance, real estate and business finance. Learn more at EricRosenberg.com.

 

QUIZ: Do You Know Your Banking Terms?

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