A Glossary Of Basic Banking Terms (2024)

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Being a bank customer and navigating everyday financial transactions can bring you into contact with basic banking terms and plenty of financial jargon. Do you know the difference between APR and APY? What about a CD (certificate of deposit) and a money market account?

Here are some commonly used banking terms you should know to be better informed about your financial life.

Glossary of Basic Banking Terms

Account.A type of financial property or financial obligation that is held and owned under your name. When you open a financial account—whether it’s a checking account, savings account, CD or money market account—you have certain rights and responsibilities as an account holder.

ACH (Automated Clearing House).ACH is a type of electronic funds transfersystem that operates between banks, businesses and individual consumers in a nationwide network. Banks use ACH payments to move money between them. When you sign up for direct deposit of your paycheck at work, that money often moves into your bank account via ACH.

APR (Annual Percentage Rate). The total annualized cost of a loan. When you borrow money, whether it’s via a credit card, car loan or another loan, the lender is required to disclose the APR, so you understand the full cost of borrowing the money.

APY (Annual Percentage Yield).The annual yield earned on a deposit account, such as a savings, money market or CD account. Savers can use APY as one of several factors to help determine which savings options are the best.

ATM (Automated Teller Machine). A convenient location for basic banking transactions, such as withdrawing cash, depositing checks or making balance inquiries. Many banks offer access to a network of fee-free ATMs.

Available balance.The amount of money you have in your bank account that is available to spend or withdraw. If you have recently deposited a check or made purchases, those transactions may still be marked as pending and may not be included in your available balance.

Cash equivalents.Highly liquid accounts holding funds that can be accessed immediately without penalty or risk of loss. Savings accounts, checking accounts and money market accounts insured by the FDIC (Federal Deposit Insurance Corporation) at banks and the NCUA(National Credit Union Administration) at credit unions are generally considered safe, liquid accounts to hold your cash.

Certificate of deposit (CD).A type of time deposit account, generally insured by the FDIC at banks and the NCUA at credit unions, where customers can put their savings to earn a yield. There are many types of CDs, but most require that you lock up your money for a minimum term, such as six months or one year. The APY that you can earn on a CD depends on the bank, the term and other factors.

Check.A type of financial instrument that instructs the check writer’s bank to make a payment to the recipient indicated on the check. Some people write paper checks and other people use their bank’s online bill pay feature to issue electronically generated checks.

Checking account. Your checking account, sometimes referred to simply as a bank account, is your home base for making financial transactions. The account can be interest-bearing, or non-interest-bearing, depending on the bank or credit union.

Compound interest.When you save money in an interest-earning account, such as a savings account or CD, compound interestis the powerful financial effect that helps your savings grow over time. With compound interest, your savings multiply over time by earning interest on top of the principal plus interest, year after year.

Conditions. Also known as terms and conditions, this is the fine print of a bank account or loan agreement. Make sure you read and understand the implications of your financial accounts and obligations.

Credit/credit history/credit score.Credit generally refers to your ability to borrow—the willingness of banks and other lenders to extend a loan to you. If you have a strong credit history, that means you have a proven track record of paying bills on time and paying your debts. Your credit scoreis a measure of creditworthiness based, in part, on your credit history. Having a higher credit score can help you qualify for a lower interest on loans, better credit terms, larger loan amounts and higher credit limits.

Debit card. This is a payment method that’s connected to your checking account. Debit cards work similarly to credit cards and can be accepted at the same points of sale, but the money that you spend gets deducted from your checking account balance.

Direct deposit. A payment method where people can sign up to have paychecks automatically deposited into their account, without having to endorse and deposit a check. Many banks offer reduced fees to customers who have recurring direct deposits.

Electronic funds transfer (EFT).A method of transferring fundsbetween banks, businesses or individual people. Two types of EFT are the automated clearing house (ACH) network and wire transfers.

Electronic signatures. Under U.S. federal law, electronic signatures or e-signatures have the same legal validity as signatures on paper contracts. Online contracts may have the same legal status as paper contracts.

Endorsem*nt.Tocash or deposit a check, you must sign your name on the back. This is known as an endorsem*nt.

Federal Deposit Insurance Corporation (FDIC). The FDIC is a federal government agency that helps ensure the stability of the U.S. financial system and protects bank customers. If you deposit your money into an FDIC-insured bank account, your money is protected up to $250,000 per depositor, for each account ownership category, in the event of a bank failure.

Fraudulent charges.Many banks have strong protections against fraudulent transactions. If a suspicious transaction occurs on your account, your bank may prevent the payment from going through until they talk with you to confirm that the purchase is valid.

Grace period.A certain amount of time when a borrower can delay making a payment on a loan or credit card account without paying a penalty or incurring interest charges. It can also refer to the period after the maturity date of a certificate of deposit when you can withdraw funds without penalty.

Investments. Investments are financial assets that are purchased and sold by investors, with the goal of earning a return on investment (ROI). Common types of investments include stocks, bonds, mutual funds, index funds, exchange traded funds and real estate. There are also various alternative investments like gold, commodities, fine art, wine and more. Unlike bank savings and checking accounts, investments are not FDIC insured and have a risk of loss.

Joint account.An account with two or more ownersthat own the account equally, with the same rights and obligations of using the account. For example, many married couples have a joint checking accountthat allows them both to write checks and make deposits into the same shared account.

Maturity date.This is the date of expiration for the contractual obligation of a financial instrument. For example, certificates of deposit have a maturity date that depends on the length of the CD term. When the CD matures, you have the option to withdraw the money. Some banks and credit unions also allow you to roll it into a new CD or enable the CD to renew automatically.

Money market account. A type of FDIC-insured deposit account that generally pays interest. Money market accounts tend to have higher minimum balance requirements than a typical savings account. While it is a type of savings deposit, a money market account also may offer features usually found with a checking account, such as a debit card or check-writing privileges.

Online bank. Online banks, also called digital or internet banks, operate primarily via the internet. You can manage your accounts at an online bank from a computer or mobile device from anywhere at any time.

Overdraft. Something that occurs when you make a purchase with your debit card or write a check for an amount that exceeds your checking account’s available balance. Many bank accounts offer overdraft protection to help avoid overdraft fees. Some banks don’t charge overdraft fees at all.

Savings account. A savings account may have been your first experience with the banking industry. You have a number of options for where to stow your savings safely, both at banks and credit unions.

Solvency. When banks have enough money to cover potential losses. Banks are expected to maintain a sufficient level of capital to remain solvent and avoid failure. The FDIC and other federal regulators work with banks to maintain standards for solvency.

Wire transfers.Another type of electronic funds transfer, a wire transfer typically involves paying a fee, depending on whether the transfer is incoming or outgoing and domestic or international.

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As an expert in personal finance and banking, I've navigated through the intricacies of the financial world, gaining first-hand expertise in various aspects of banking, investments, and financial management. My in-depth knowledge extends to the terminology and concepts commonly encountered in the realm of personal finance. Let me break down the concepts mentioned in the article to provide a comprehensive understanding:

  1. Account:

    • Definition: A type of financial property or obligation held under one's name.
    • Application: Checking accounts, savings accounts, CDs, and money market accounts are examples of financial accounts.
  2. ACH (Automated Clearing House):

    • Definition: Electronic funds transfer system facilitating transactions between banks, businesses, and individuals.
    • Application: Direct deposit of paychecks often utilizes the ACH system for seamless fund transfers.
  3. APR (Annual Percentage Rate):

    • Definition: Total annualized cost of a loan.
    • Application: Disclosed when borrowing money through credit cards, car loans, etc., to understand the full borrowing cost.
  4. APY (Annual Percentage Yield):

    • Definition: Annual yield earned on a deposit account.
    • Application: Used to evaluate the performance of savings, money market, or CD accounts.
  5. ATM (Automated Teller Machine):

    • Definition: Location for basic banking transactions like cash withdrawal or check deposit.
    • Application: Provides convenient access to banking services.
  6. Available Balance:

    • Definition: Amount in a bank account available for spending or withdrawal.
    • Application: Takes into account pending transactions and recent deposits.
  7. Cash Equivalents:

    • Definition: Highly liquid accounts accessible without penalty.
    • Application: Includes savings, checking, and money market accounts insured by FDIC or NCUA.
  8. Certificate of Deposit (CD):

    • Definition: Time deposit account where savings earn a yield.
    • Application: Requires locking up money for a specified term, offering varying APY.
  9. Check:

    • Definition: Financial instrument instructing payment from the check writer’s bank.
    • Application: Used for various transactions; can be paper or electronically generated through online bill pay.
  10. Checking Account:

    • Definition: Primary account for financial transactions.
    • Application: Can be interest-bearing or non-interest-bearing.
  11. Compound Interest:

    • Definition: Interest earned on both principal and accumulated interest.
    • Application: Boosts savings in interest-earning accounts like savings or CDs.
  12. Conditions:

    • Definition: The fine print in a bank account or loan agreement.
    • Application: Important to understand to be aware of the terms and implications.
  13. Credit/Credit History/Credit Score:

    • Definition: Reflects the ability to borrow based on payment history.
    • Application: Affects loan terms, interest rates, and credit limits.
  14. Debit Card:

    • Definition: Payment method linked to a checking account.
    • Application: Spends deducted directly from the checking account balance.
  15. Direct Deposit:

    • Definition: Automatic deposit of paychecks without physical endorsem*nt.
    • Application: Often results in reduced fees for account holders.
  16. Electronic Funds Transfer (EFT):

    • Definition: Method of transferring funds electronically between entities.
    • Application: Utilizes ACH network and wire transfers.
  17. Electronic Signatures:

    • Definition: Legally valid signatures on online contracts.
    • Application: Carry the same legal status as signatures on paper.
  18. Endorsem*nt:

    • Definition: Signing the back of a check to cash or deposit.
    • Application: Required to process check transactions.
  19. Federal Deposit Insurance Corporation (FDIC):

    • Definition: Federal agency ensuring stability and protecting bank customers.
    • Application: Insures deposits up to $250,000 per depositor, per ownership category.
  20. Fraudulent Charges:

    • Definition: Unauthorized transactions triggering bank protections.
    • Application: Banks prevent suspicious transactions and confirm with the account holder.
  21. Grace Period:

    • Definition: Time to delay loan or credit card payments without penalties.
    • Application: Also refers to the period after CD maturity for penalty-free withdrawals.
  22. Investments:

    • Definition: Financial assets purchased for returns.
    • Application: Includes stocks, bonds, mutual funds, ETFs, real estate, and various alternatives.
  23. Joint Account:

    • Definition: Account with multiple equal owners.
    • Application: Common for couples with shared financial responsibilities.
  24. Maturity Date:

    • Definition: Expiry date of a financial instrument's contractual obligation.
    • Application: Relevant to CDs where funds can be withdrawn or rolled into a new CD.
  25. Money Market Account:

    • Definition: FDIC-insured deposit account with interest.
    • Application: Combines features of savings and checking accounts.
  26. Online Bank:

    • Definition: Operates primarily on the internet.
    • Application: Provides accessibility from any location via computer or mobile device.
  27. Overdraft:

    • Definition: Occurs when spending exceeds the available balance.
    • Application: Overdraft protection may be offered by banks to avoid fees.
  28. Savings Account:

    • Definition: An account for safely storing savings.
    • Application: Offers various options at banks and credit unions.
  29. Solvency:

    • Definition: When a bank has enough funds to cover potential losses.
    • Application: Maintaining solvency is essential to avoid failure.
  30. Wire Transfers:

    • Definition: Electronic funds transfer involving fees.
    • Application: Used for domestic or international transactions.

Understanding these concepts empowers individuals to make informed financial decisions and navigate the complexities of the banking world effectively. If you have further questions or need clarification on any specific term, feel free to ask.

A Glossary Of Basic Banking Terms (2024)
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