Financial Wellness
Back to Basics: A Helpful Glossary of Banking Terms
Sometimes financial jargon can be confusing. Whether you're just starting out on your lifelong financial journey, or need a refresher course, here are 20 common banking terms explained and their definitions.
Annual Percentage Rate (APR). The actual annual cost charged for borrowing over the term of the loan, expressed as a percentage. This includes fees or additional costs associated with the loan transaction.
Annual Percentage Yield (APY). The effective annual rate of return taking into account the compounding of interest on a savings, checking, certificate, or money market account. Here, a higher APY is better for you.
Credit Card. One of the most popular forms of credit, allowing you to spend up to a specific limit. You'll be charged interest on the balance at the end of the due date, so to avoid paying any interest, pay off your full balance each month.
Credit Limit. The maximum amount you're allowed to charge on a credit card or other line of credit. Once you've shown a habit of paying bills consistently on time, a lender may raise your credit limit, giving you more spending power.
Credit Score. A three-digit number that represents how likely you are able to pay debts, and, by extension, how much credit you should have. A higher score can make it easier to qualify for loans or get better interest rates.
Debit Card. A card that's linked directly to your checking account. When you use it to make purchases or make transactions at ATMs, it draws the money from your checking account, in contrast to a credit card where you're borrowing the money and have to pay it back later.
Digital Wallet. A service or app that stores virtual versions of your payment methods, like credit and debit cards, allowing you to make secure purchases from your smartphone, computer, or other device.
Direct Deposit. A convenient, automatic way to deposit to your account made by your employer or an outside agency (i.e., pension or Social Security). These are usually recurring and spare you the hassle of depositing a paper check. It also helps protect against fraud.
Dividend. Taxable payments made by a company to its shareholders, or in the case of credit unions, to its members—based on profits. Some dividends are paid quarterly and others are paid monthly, and the percentage earned can fluctuate.
Emergency Fund. A savings safety net that's specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, medical bills, or a loss of income.
Fixed-Rate Mortgage. A home loan, called a mortgage, with a set interest rate that will not change over the life of the loan. In contrast, an Adjustable-Rate Mortgage (ARM) has an interest rate that's fixed for an initial period, and then adjusts periodically based on market conditions.
Home Equity. The real value of a home after all liabilities have been paid. For example, a home worth $300,000 with a $200,000 mortgage would have $100,000 in equity.
Individual Retirement Account (IRA). A savings account to help you build retirement funds with tax advantages. Once you reach age 73, you typically must begin taking the required minimum distributions. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
Money Market Account. A savings option that typically earns higher earnings than most traditional savings accounts without requiring a long-term commitment of funds. The more you save, the higher the dividends earned.
Overdraft Protection. An arrangement made between you and your bank or credit union. such as a link to a savings account or to an overdraft line of credit, that allows you to withdraw more than the balance in your account.
Prime Rate. The interest rate that financial institutions use to establish the indexed rate for certain loan products. The prime rate is published in The Wall Street Journal.
Routing Number. The first nine numbers that appear at the bottom of a check that identifies the financial institution responsible for holding the account during transactions.
Scheduled Transfer. An automatic transaction that moves money from one account to another on a regular recurring basis, often monthly.
Share Certificate. A deposit with a credit union that promises a fixed interest rate and rate on return on funds deposited for a specified period of time.
Wire Transfer. A payment service for transferring funds electronically, Wire transfers are guaranteed funds for the recipient, meaning the payment cannot be revoked by the sender after the transfer.
Annual Percentage Rate (APR). The actual annual cost charged for borrowing over the term of the loan, expressed as a percentage. This includes fees or additional costs associated with the loan transaction.
Annual Percentage Yield (APY). The effective annual rate of return taking into account the compounding of interest on a savings, checking, certificate, or money market account. Here, a higher APY is better for you.
Credit Card. One of the most popular forms of credit, allowing you to spend up to a specific limit. You'll be charged interest on the balance at the end of the due date, so to avoid paying any interest, pay off your full balance each month.
Credit Limit. The maximum amount you're allowed to charge on a credit card or other line of credit. Once you've shown a habit of paying bills consistently on time, a lender may raise your credit limit, giving you more spending power.
Credit Score. A three-digit number that represents how likely you are able to pay debts, and, by extension, how much credit you should have. A higher score can make it easier to qualify for loans or get better interest rates.
Debit Card. A card that's linked directly to your checking account. When you use it to make purchases or make transactions at ATMs, it draws the money from your checking account, in contrast to a credit card where you're borrowing the money and have to pay it back later.
Digital Wallet. A service or app that stores virtual versions of your payment methods, like credit and debit cards, allowing you to make secure purchases from your smartphone, computer, or other device.
Direct Deposit. A convenient, automatic way to deposit to your account made by your employer or an outside agency (i.e., pension or Social Security). These are usually recurring and spare you the hassle of depositing a paper check. It also helps protect against fraud.
Dividend. Taxable payments made by a company to its shareholders, or in the case of credit unions, to its members—based on profits. Some dividends are paid quarterly and others are paid monthly, and the percentage earned can fluctuate.
Emergency Fund. A savings safety net that's specifically set aside for unplanned expenses or financial emergencies. Some common examples include car repairs, medical bills, or a loss of income.
Fixed-Rate Mortgage. A home loan, called a mortgage, with a set interest rate that will not change over the life of the loan. In contrast, an Adjustable-Rate Mortgage (ARM) has an interest rate that's fixed for an initial period, and then adjusts periodically based on market conditions.
Home Equity. The real value of a home after all liabilities have been paid. For example, a home worth $300,000 with a $200,000 mortgage would have $100,000 in equity.
Individual Retirement Account (IRA). A savings account to help you build retirement funds with tax advantages. Once you reach age 73, you typically must begin taking the required minimum distributions. Withdrawals are taxed as ordinary income and, if taken before age 59½, may be subject to a 10% federal income tax penalty.
Money Market Account. A savings option that typically earns higher earnings than most traditional savings accounts without requiring a long-term commitment of funds. The more you save, the higher the dividends earned.
Overdraft Protection. An arrangement made between you and your bank or credit union. such as a link to a savings account or to an overdraft line of credit, that allows you to withdraw more than the balance in your account.
Prime Rate. The interest rate that financial institutions use to establish the indexed rate for certain loan products. The prime rate is published in The Wall Street Journal.
Routing Number. The first nine numbers that appear at the bottom of a check that identifies the financial institution responsible for holding the account during transactions.
Scheduled Transfer. An automatic transaction that moves money from one account to another on a regular recurring basis, often monthly.
Share Certificate. A deposit with a credit union that promises a fixed interest rate and rate on return on funds deposited for a specified period of time.
Wire Transfer. A payment service for transferring funds electronically, Wire transfers are guaranteed funds for the recipient, meaning the payment cannot be revoked by the sender after the transfer.
Do You Know the Difference Between a Bank and a Credit Union?
The main difference is that banks are for-profit, shareholder-owned businesses, while credit unions are not-for-profit, member-owned cooperatives.
This difference in ownership structure means banks are driven by profit, which can lead to higher fees and lower interest rates, whereas credit unions are focused on their members' benefit, which often translates to lower fees, higher savings rates, and better loan rates.
While banks are open to anyone, credit unions often have membership requirements based on a common bond, such as location, employer, or affiliation.
This difference in ownership structure means banks are driven by profit, which can lead to higher fees and lower interest rates, whereas credit unions are focused on their members' benefit, which often translates to lower fees, higher savings rates, and better loan rates.
While banks are open to anyone, credit unions often have membership requirements based on a common bond, such as location, employer, or affiliation.
Resources: Consumer Finance Protection Bureau, Nationwide
