Banking Terms You Should Know
Written by
Caitlyn Moorhead
Edited by
Amber Barkley
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Breaking down the banking terms you run into daily will help you better understand where your money is going and how it is growing.
GOBankingRates’ Glossary of Basic Banking Terms
This glossary of basic terms can help you crack any code of account documents or other information from your bank, credit union or financial institution.
Account
An account is a financial holding, obligation or property under your name. As an account holder, you hold the rights and responsibilities to any accounts in your name. Common examples include checking accounts, savings accounts, CDs or money market accounts.
Account History
This will show all of your transactions, payments, overdrafts and other account activity over a specified period of time.
Account Holder
If your name is on the account, you are the account holder and maintain any rights, privileges and responsibilities to that account.
Accrued Interest
Any interest you have earned on an account but that has not yet been paid is considered accrued interest.
ACH
This stands for Automated Clearing House and is a type of electronic funds transfer. It is used as a system to move payments or money between individuals, banks or businesses. For example, any direct deposit paycheck you have ever received was most likely done via ACH.
APR
This stands for annual percentage rate and is the total cost, calculated annually, of any loan you take out expressed as a percentage. This interest is generally added to loans, such as mortgages, auto loans and credit cards.
APY
This stands for annual percentage yield and is the amount of interest you earn annually on deposit accounts you have, such as high-yield savings, CD or money market accounts.
ATM
This stands for automated teller machine, which is a small machine that serves as an extension of banks and credit unions where you can withdraw money or complete other banking transactions.
Automated Bill Payment
Automated or automatic bill payment is when you authorize your account, through your financial institution, to automatically pay recurring bills.
Available Balance
The amount of funds available to spend, transfer or withdraw in your bank account are your available balance. Any money that is pending is not part of your available balance.
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Balance Transfer
Often done to retain a lower interest rate, this is the process of moving an outstanding balance from one credit card to another account.
Bank Statement
This report tracks any activity in your deposit account, such as checks paid or debit transactions. This statement is typically sent every month and contains your current balance.
What are 4 Types of Banks?
The four major types of banks are national banks, credit unions, regional banks and commercial banks.
Bond
A form of U.S. savings investment that are considered low-risk and long-term investments. They are issued by the U.S. government and typically come in denominations ranging between $50 and $10,000.
Cash Equivalents
These are funds that can be accessed immediately and without penalty from highly liquid accounts.
Certified Check
A personal check that is guaranteed to be good and has the signature of a bank official. This check will be marked as “certified” or “accepted” and verifies there are sufficient funds for the amount disclosed on the check.
Certificate of Deposit
Commonly referred to as CDs, these are FDIC-insured deposit accounts where you put your money for a set period to earn a higher APY. There are many types of CDs with varying term lengths, generally ranging from three months to five years. Any deposit you put into this account, you cannot access until it has reached maturity without incurring early withdrawal penalties.
Check
Physical or electronically generated checks are forms of payment written out to transfer money from your bank account to the indicated recipient.
Checking Account
This bank account is a highly liquid account, often used for day-to-day banking or regular financial transactions. Checking accounts often come with debit cards and paper checks.
Collateral
When you are looking to secure a loan or credit, you are sometimes required to put up assets you own as incentive to pay the loan back. These assets are considered collateral and can be seized if you default on your loan.
Compound Interest
Compound interest means you are not only earning interest on the principal — your initial deposit — but also earning interest on top of interest, making your savings multiply yearly.
Credit or Credit History
If you are looking to secure a loan or borrow money, your credit is how financial institutions assess your ability to do so.
Your credit history is your record of spending, paying bills and debts. A strong credit history is built by paying these debts and bills on time, which means you’ll be more likely to secure a loan or borrow at a better rate.
Credit Report
Your credit card issuer will give you a detailed report of your credit history, which is known as a credit report. Lenders use this report to deem the level of your creditworthiness.
Credit Score
Your credit history will dictate whether you have a high or low credit score. This score is used to measure your creditworthiness and will affect your ability to qualify for a loan and what interest rates you’ll get, as well as your credit limit. Credit scores range from 300 to 850 and the higher the better.
Debit Card
Typically connected to your checking account, this card is a payment method that directly deducts payments from your checking account balance.
Deferred Payment
A payment that you postpone until a future date is considered a deferred payment.
Direct Deposit
This is a checkless system where funds are automatically deposited into your bank account. Commonly used by companies for their employees to receive paychecks, direct deposit eliminates the need to endorse and deposit a physical check.
EFT
This stands for electronic funds transfer and is a process of transferring funds between banks, individuals or businesses.
Escrow
When a large transaction happens between two parties, a third party — or escrow service — holds the funds until all obligations on both sides have been filled. For example, if you were to put a down payment on a house, your money would be in escrow until you the buyer and the seller agreed to terms and signed the contract.
FDIC
This stands for Federal Deposit Insurance Corporation and is a government agency that regulates and helps stabilize the U.S. financial and banking system. It protects bank customers and insures your bank accounts for up to $250,000 per depositor in the event of a bank failure.
Federal Reserve System
Commonly known as the Fed, this system is the central bank of the United States. It is run by the federal government and covers areas such as conducting monetary policy, regulating banking institutions, protecting the credit rights of consumers, maintaining the stability of the financial system and providing financial services to the U.S. government
Fixed Rate
This is an interest rate that stays the same throughout the life of a loan.
Fraudulent Charges
These are suspicious transactions that occur in your account that you didn’t make. Your bank generally has protections against these charges and can work with you to remove them or keep them from happening.
Guarantor
A guarantor is a person who has signs a contract with you — such as a lease — and agrees to pay the debt should you default on it.
Grace Period
Often on loans or credit card accounts, you are given a grace period, which is the amount of time you can delay making payments without incurring penalties or interest charges.
HELOC
This stands for home equity line of credit and is a line of credit you can secure that is based on the value of your home. This cash advance can be used for major purchases or debt consolidation, and the interest you pay on it is usually tax deductible.
Home Equity Loans
This loan is one homeowners can take and is based on the equity your home has built up. It is valued as the difference between what your house is worth and what you still owe on the loan.
Insufficient Funds
If you write a check, make a withdrawal or purchase an item for more money than you currently have in your account, this means you will have insufficient funds.
Interest Rates
An interest rate is a percentage that represents either the amount of money you have to pay on a loan or the amount of money you earn on a deposit account.
Investments
When you put money into such things as stocks, bonds, mutual funds, gold, ETFs or real estate, you are making a type of investment. This means you are hoping to earn a return on investment, or ROI, which would give you more money on the purchase than what you originally paid for it.
Joint Account
When two or more people are account holders and own equal rights and obligations of the funds or assets within the account, the account is a joint account.
Maturity Date
The maturity date is the ending date of an investment with a specific term. For example, if you put your money into a 3-month CD, your CD will have reached its maturity date in three months, at which point you can withdraw your funds without penalty.
Money Market Account
A money market is a type of deposit account that pays interest and is FDIC-insured. These accounts are something of a middle ground between checking and savings accounts — they usually have a higher minimum balance requirement and lower APY than a traditional savings account, but you can link a debit card or write checks from the account, similar to a checking account.
Mortgage
A mortgage is the amount of money you borrow from a lender to purchase a home or real estate property, on which you pay interest. This puts your real estate up as collateral for the mortgage loan.
Online Bank
An online bank has no physical branches and operates solely online, via the internet. They are also often called internet or digital banks and, aside from in-person banking, offer the same products and services as traditional banks.
Overdraft
If you attempt to write a check or buy something with your debit card that is more money than you have in your account, an overdraft will occur. Depending on your bank account, if you overdraft your account, you could incur fees.
Principal
The base amount of money you owe on a loan — that doesn’t include the interest or fees — is called the principal.
ROI
This stands for return on investment and is the amount of money you earn on such purchases as real estate, stocks, bonds or ETFs.
Savings Account
This is a bank account with an APY where you can safely deposit funds and store them away in the hopes of growing your wealth. Savings accounts are best for funds you are keeping for a later purpose rather than funds you’ll need for your living expenses, because they often limit the number of withdrawals you can make per month.
Solvency
To avoid failure, banks are expected to maintain a sufficient level of capital. Banks that have enough money to cover any potential losses are considered solvent.
TILA
This stands for the Truth in Lending Act and is a federal law that requires banks and lenders to provide certain standard information, such as what credit will cost you as a borrower, what charges will be imposed and what your rights are as a borrower and consumer.
Variable Rate
Unlike a fixed rate, a variable rate is an interest rate that changes periodically.
Wire Transfers
This is a way of sending money as an electronic funds transfer between banks. They often come with a fee.
