Understanding basic banking and finance — and the terminology people use to talk about them — can make a big difference in your bank balance.
Here are 10 banking terms you should know to manage your money better.
1. Routing number
A nine-digit number that identifies your financial institution. Larger banks may have multiple routing numbers that are based on the geographic location where the account was opened.
2. FDIC
The Federal Deposit Insurance Corp. A government-run organization that insures customers’ bank deposits up to $250,000 if the bank fails. The National Credit Union Administration is the equivalent for credit unions.
3. Certificate of deposit
Commonly known as a CD, an account into which you deposit a sum of money and agree to keep it there for a specified length of time. The account typically pays higher interest rates than standard savings and checking accounts.
4. APY
Annual percentage yield. The amount of interest you gain from keeping money in an account in a year, including compound interest.
5. APR
Annual percentage rate. The amount of interest you gain from keeping money in an account in a year, not including compound interest. In the context of a loan, the APR represents the cost of borrowing money.
6. Compound interest
Interest that applies to the original deposit as well as any newly earned interest. For example, if you put $100 in an account that earns compound interest at 5% a year, in the next year you will earn 5% on $105. Noncompounding interest would continue to earn 5% on $100.
7. Savings account
Typically, an interest-bearing account used to hold money for short- or long-term goals or emergencies. You can add to this account at any time, but certain types of withdrawals may be limited to six per month.
There is a wide range of interest rates available for savings accounts, and online banks tend to have higher rates than national banks.
8. Returned item fee
A bounced-check fee charged to the person trying to deposit the check. It can be charged if there are insufficient funds in the check writer’s account or if the account is closed.
9. Overdraft fee
A fee incurred when your checking account doesn’t have enough funds to cover a payment that is requested. The financial institution will pay what your account lacks, after which your account may have a negative balance.
10. Checking account
An account at a financial institution into which you can deposit money and from which you can write checks for purchases. Most people use checking accounts to receive their wages and pay their bills.
Financial institutions may be awash in jargon, but this glossary of banking terms should help you understand even the most confusing of concepts.
