Decoding Financial Jargon Quiz

Answer: B. Net income. It's important to know the difference between "gross" income and "net" income, especially when it comes to applying for a mortgage or other loans. Gross income is the total amount of pay earned before taxes and other payroll deductions like health insurance, 401(k) contributions, etc. Net income is the amount of pay left after taxes and deductions are taken out, also called your "take home pay."

Answer: A. Amortization is the process used to determine the amount of equal monthly payments for fixed-rate loans over the loan term. Since the total of each loan payment includes a portion of interest and principal, this process is used to determine the amount of each in fixed-rate mortgages, auto loans, and other types of consumer loans, also called an Amortization Table.

Answer: B. A credit score is the number the credit bureaus (Experian, TransUnion, and Equifax) give every consumer based on how well they manage their finances. Your credit score is one of the most important financial terms to be familiar with. Credit scores range from below 580 to above 800 and reflect your creditworthiness considering your total debt, payment history, number of credit accounts, and other factors. A good credit score (670 and above) means better interest rates, which can save you thousands of dollars over time. Tower members can view their free VantageScore® and TransUnion credit report through ID Smart Shield inside Digital Banking.* You can also get a free copy of your credit report from all three credit bureaus annually at AnnualCreditReport.com.
*The credit scores provided are based on the VantageScore® 3.0 model. Lenders use a variety of credit scores and are likely to use a credit score different from VantageScore® 3.0 to assess your creditworthiness.

Answer: A. True. Compounded Interest is interest earned on savings accounts and investment products that is paid to you. Depending on your interest rate and the amount you have in your account, compound interest can add up over time. To determine compound interest, multiply the amount of money in an account by the interest rate each year. For example, if you have $1,000 earning 5% interest annually, you'll have $1,050 at the end of the first year. In the second year, you will earn an additional 5%, giving you $1,102.50 at the end of the year, and so on (assuming you don't take any money out of the account).

Answer: B. False. Annual Percentage Yield (APY) is the annual rate of return on your money, including the compounded interest on your account. The higher the APY, the more money you earn in dividends/interest. APY is often confused with Annual Percentage Rate (APR), which is the rate you are charged each year in interest on a loan or credit card. The lower the APR, the less money you pay in interest charges. So, it's important to know the difference between the two.

Answer: D. An overdraft occurs when you don't have enough money in your account to cover a transaction. Sometimes the bank will honor the transaction; however, you will usually incur a fee. Tower offers overdraft opt-in protection for occasional overdrafts.

Answer: A. True. Both are savings products that offer a fixed Annual Percentage Yield (APY) on an account for a set period of time, called a maturity date. Share Certificates and CDs typically offer higher interest and enables your money to grow more than a regular savings account. They can be a good investment option if you don't need access to the money right away as the interest compounds and grows over time.

Answer. A. ACH stands for Automatic Clearing House. And no, it's not a sweepstakes you get in the mail! ACH is the electronic network used by financial institutions to transfer money between accounts. This is how electronic transfers like direct deposits from employers and electronic payments to creditors are paid.

Answer: A. True. Your credit limit is the amount of credit extended to you on a credit card or other type of loan. It is the maximum you can spend using that method of payment. Financial institutions use your credit score to calculate the amount of credit they are willing to give you. It's important to know your credit limit, since sometimes you may be charged an over-the-limit fee. Also, maxing out your limit on a credit card has a negative impact on your credit and can lower your score, so it's important to use your credit wisely.

Answer: D. It's easy to calculate your debt-to-income (DTI) ratio, and you don't need a credit bureau or advanced math degree to do it. Grab a calculator, add up all your monthly debt payments (mortgage, credit cards, other loans) and divide your total debt by the amount of your gross monthly income. For example, if your total monthly debt is $1,500 and your monthly gross income is $3,500, your DTI ratio is 43%. It's best to keep your DTI ratio under 35%. A DTI ratio of 35% or less shows that you're managing your debt well. This range may increase your chances of getting loans with competitive rates. It also means you likely have money left over to save for your future and cover unexpected expenses.