COMMON BANKING TERMS YOU SHOULD KNOW

Banking is an industry that handles cash, credit, and other financial transactions. Banks provide a safe place to store extra cash and credit. They offer savings accounts, certificates of deposit, and checking accounts. Banks use these deposits to make loans. These loans include home mortgages, business loans, and car loans.

Banking is one of the key drivers of every economy. It provides the liquidity needed for families and businesses to invest in the future. Bank loans and credit mean families don’t have to save up before going to college or buying a house. Companies use loans to start hiring immediately to build for future demand and expansion.

Banking terminology can be complex, so we’ve provided definitions of many common banking terms to help with your personal financial planning.

1. Accrued Interest

Accrued interest is the interest accumulated over an investment but not yet paid. It is also termed as interest receivable. Some banks call it ‘Interest earned but not yet paid’.

2. Annuities

From a banking perspective, annuities are contracts. These contracts guarantee income or returns in exchange for a huge sum of money. This money is either deposited as a lump sum or with the help of periodic payments.

3. Automated Clearing House (ACH)

This is a nation-wide electronic clearinghouse that monitors and manages the process of cheque and fund clearance between banks. In simple words, when you deposit a cheque issued on a different bank into your bank account, the ACH manages the clearing process. Further, being electronic, it reduces manual work and distributes the credit and debit balances automatically.

4. Automated Teller Machines (ATMs)

Before the computerization of banking processes, account holders would visit the branch, fill a withdrawal slip or a self-cheque, go to the teller counter, and withdraw money from their account. However, the automated teller machines (ATMs) have now made that process outdated. You can conduct transactions with your bank electronically using ATMs.

5. Affidavit

   A sworn statement in writing before a proper official, such as a notary public. See related    questions about Credit Disputes and Forgery and Fraud.

6. Alteration

Any change involving an erasure or rewriting in the date, amount, or payee of a check or other negotiable instrument. See related questions about Alteration.

7. Amortization

The process of reducing debt through regular installment payments of principal and interest that will result in the payoff of a loan at its maturity.

8. Annual Percentage Rate (APR)

The cost of credit on a yearly basis, expressed as a percentage.

9. Annual Percentage Yield (APY)

A percentage rate reflecting the total amount of interest paid on a deposit account based on the interest rate and the frequency of compounding for a 365-day year. See related questions about Savings & Interest-bearing Accounts and Index-linked Certificates of Deposit (CDs).

10. Application

Under the Equal Credit Opportunity Act (ECOA), an oral or written request for an extension of credit that is made in accordance with the procedures established by a creditor for the type of credit requested. See related questions about Loan Application Denials.

11. Appraisal

The act of evaluating and setting the value of a specific piece of personal or real property. See related questions about Home Equity Appraisals.

12. Savings Account:

 An account that encourages saving due to its higher interest rate. Many savings accounts have restrictions on how many times per month you can withdraw money.

13. Checking Account:

 An account that allows the holder to deposit and withdraw money as needed to cover daily expenses.

14. Deposit:

 Money that is added to an account.

15. Withdrawal:

 Money that is taken out of an account.

16. Balance:

 The total funds that are in an account.

17. Interest:

 A percentage of an account balance that is paid to the account holder periodically. Banks use interest to reward account holders for letting them hold their money.

18. Minimum Deposit:

 The lowest dollar amounts necessary to deposit in order to open a new account.

19. Minimum Balance:

The minimum balance that a bank requires account holders to maintain in their accounts each day. If an account goes below the minimum balance, the bank will charge the account holder a maintenance fee.

20. Overdraft:

 If an account holder tries to withdraw more money than they have available in their account, that is called an overdraft. If an account is over drafted, the bank will charge the account holder an overdraft fee.

21. Account Statement:

 A monthly summary of all account activity sent by the bank to the account holder either in the mail or online.

22. Direct Deposit:

 A form of receiving a paycheck in which the worker’s earnings are transferred electronically into their chosen account or accounts. Some banks will waive fees on checking accounts if the account holder receives a minimum direct deposit amount each month.

23. Bounced Check:

X`A check that is returned because there are not enough funds in the account to cover the amount of the check.

24. Debit Card:

A plastic payment card that withdraws funds from the user’s checking account.

25. Stop Payment:

In case a check is stolen, the account holder can issue a stop payment notice to their bank. This notice protects the account holder from fraudulent charges.

26. Transfer:

Sending money from one account to another. You can transfer money between your own accounts or from an account that you own to another person’s account.

27. Boom and bust

 A process of economic expansion and contraction, often in repeated cycles.

28. Boutique

An investment bank which offers some but not all banking services, generally in corporate finance.

29. Broker

 A person who buys and sells stocks for others in return for a commission.

30. Budget

 The Government’s plans for the fiscal year.

31. Bulge bracket

 The largest multinational investment banks.

32. Capital

Assets which are available for a purpose such as investment or starting a company. It is different to money because money is used only to purchase things, capital is used to generate wealth, e.g. through investment.

33. Capital market

The financial system which raises capital by dealing in shares, bonds and long term investments.

34. Cash flow

The amount of money being transferred in and out of a business, affecting liquidity.

35. Chancellor of the Exchequer

The chief finance minister of the UK who prepares the Budget.

36. Collateral

Assets that are offered to secure a loan or type of credit

37. Commodity

A raw material that can be bought or sold such as coffee or coal.

38. Credit

A payment received. Alternatively, an agreement to repay something of value in the future. Thirdly, the borrowing capacity of a person or company.

39. Credit rating

An assessment of a particular issuer’s creditworthiness which results in a rating being assigned. Ratings range from AAA (very high) to D (in default). Several companies study issuers and make ratings decisions.

40. Debit

A payment made.

41. Default

Failure to repay a loan.

42. Diversification

The strategy of investing broadly across a number of different investments to reduce risk; a hallmark of mutual fund investing.

43. Domiciled

Reside or be based.

44. Duty

A tax levied on goods not humans

45. Emerging market

A country which is developing the characteristics of a developed market, but is not yet fully developed. Normally a country experiencing rapid growth and industrialization.

46. Exposure

Being placed at risk of financial losses.

47. Financial Instrument

A document involving monetary value which can be equity based, represent ownership of an asset or represent a loan made to an owner of an asset. They are tradeable packages of capital. Essentially, it is an equity, asset or loan.

48. Fiscal

Government revenue, e.g. taxes.

49. Front Office

The sales personnel and finance employees – normally where revenues are generated.

50. FTSE 100

“Financial Times Stock Exchange”, pronounced “futsie” – a share index of 100 companies on the London Stock Exchange with the highest market capitalization. Its rises and falls are used as a gauge of business prosperity.

51. GDP

“Gross Domestic Product” – the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, usually annually.

52. Gold Standard

A now obsolete exchange whereby the value of a currency is defined by gold.

53. Golden Rule of Banking

Short term transactions should be financed with short term money, and long term transactions with long term funds.

54. Government bond

A bond issued by a national government to finance spending. While this means the bond is free of credit risk because the government can always pay the debt by raising taxes or printing money, it does depend on a stable political system.

55. Gross

The full amount of income, profit or interest without any deductions from tax or costs.

56. Hedge

An attempt to protect against loss on a bet or investment by making a compensating transaction.

57. Hedge fund

Investments of a few (normally wealthy) people pooled together and managed professionally. Their goal is to aggressively maximize return on the investment but the term actually originates from their previous strategy of “hedging risk”.

58. Holding company

A parent corporation, limited liability company or limited partnership that owns enough voting stock in another company to control its policies and management. This means the holding company is protected against the other company’s losses or liabilities, but reaps the rewards of its profits. It can also be based in jurisdictions with lower tax rates while allowing the other company to continue to operate wherever.

59. IMF – International Monetary Fund

Created to promote monetary and exchange stability in the global economy. This means it monitors financial developments around the world and lends funds to needy countries.

60. Inflation

An increase in prices which means that the purchasing power of money falls – in other words you get less for your money than you used to.

61. Interest

Money paid regularly as a charge for borrowing money, typically an annual percentage rate.

62. IPO – Initial Public Offering

The first sale of a company’s shares to the public, also known as a stock market listing or flotation. Often used as a means for a young company to raise capital to expand.

63. Junk bond

Risky investments which can offer higher yields than safer bonds. Often issued by companies with a low credit rating as investors demand higher rewards as compensation for the risk of investing in them.

64. Leverage

Borrowing capital to finance an investment much larger than that which the borrower can afford with their own cash, in order to increase the potential return of the investment. For example, instead of using £200,000 to buy one house to sell on for £220,000, the investor could split their money across 10 houses priced at £200,000 and pay £20,000 to each and borrow the money to pay the rest.

Then they could sell the houses for £220,000 x 10 and make £200,000 profit, not the £20,000 they make on buying a house entirely with their own money. The bigger the ratio of borrowed money to owned, the more leveraged they are. Likewise a company which has £10 million can borrow £20 million and have £30 million to spend on growth, without increasing its equity and diluting its shares.

65. Liability

 A company’s debts that arise during its business operations, e.g. loans.

66. Cheque

A cheque is a negotiable instrument. By definition, a negotiable instrument is a document that includes a promise to pay a certain amount of money to the intended beneficiary. A cheque instructs the bank to pay a certain amount of money from the issuer’s bank to the receiver of the cheque.

67. Clearing

Clearing of a cheque is done by the Clearing House. Further, in this process, the amount of the cheque is debited from the issuer’s account and credit to the beneficiary’s account.

68. Debit Card

A debit card allows you to access the funds available in your account either from an ATM or a point of sale (Pos). The amount used by you is instantly debited from your account. Also, there is no credit available on a debit card.

69. Guarantor

A guarantor creates a trust which takes the responsibility of repayment of a loan. Usually, a guarantor is not liable for the repayment of the loan. However, in some cases, the liability and responsibility of repaying the loan lie with the guarantor.

71. Internet Banking

Most banks allow account holders to access their accounts using the internet. You can also perform certain transactions using this system. This is internet banking or online banking or e-banking.

72. Mortgage

A mortgage is related to real estate. It is a legal agreement between a lender and a borrower. Further, the real estate property of the borrower is used as collateral for the loan.

This also helps in securing the payment of the debt. Usually, in a mortgage agreement, the lender has a right to confiscate the property if the borrower stops paying the installments.

73. Overdraft

It is the amount of cheque above the balance in the account of the issuer. Further, some banks allow certain account holders to overdraft up to a certain limit.

74. Repo Rate

Repo Rate or the Repurchase Rate is the rate at which a bank borrows money from the Reserve Bank of India (RBI). The bank pledges or sells government securities to the RBI for the same.

Also, these loans are usually for a period of up to two weeks. Hence, it refers to short-term loans. It is different from the Bank Rate with respect to the tenure of the loan.

75. Reverse Repo Rate

When banks have surplus funds and they deposit them with the RBI for short periods, the RBI offers them a Reverse Repo Rate.

76. Time Deposit

A time deposit is a type of a bank deposit. In this deposit, the investor cannot withdraw his funds before a fixed time elapses.

77. Wholesale Banking

Many banks offer banking services to corporate entities, large institutions, and even other financial institutions. This segment forms the Wholesale Banking segment of a bank.

78. Debit

A debit may be an account entry representing money you owe a lender or money that has been taken from your deposit account.

79. Debit Card

A debit card allows the account owner to access their funds electronically. Debit cards may be used to obtain cash from automated teller machines or purchase goods or services using point-of-sale systems. The use of a debit card involves immediate debiting and crediting of consumers’ accounts. See related questions about Debit Cards.

80. Debt Collector

Any person who regularly collects debts owed to others. See related questions about Debt Collection.

81. Debt Elimination Scheme

A debt elimination scheme is a plan that is advertised as a way for an individual to eliminate various types of debt simply by paying someone a small fee compared to the amount of debt to be eliminated. These schemes are fraudulent.

As a result of using a fraudulent scheme, individuals will lose money, could lose property, will damage their credit rating, and possibly incur additional debt. In addition, a creditor may take legal action against an individual to resolve a fraudulent attempt to eliminate debt. It is also possible for the victim to have identity theft occur by participating in such a fraudulent scheme. See related questions about Debt Elimination and Fraudulent Schemes.

82. Debtor

Someone who owes money to another party.

83. Debt-to-Income Ratio (DTI)

The percentage of a consumer’s monthly gross income that goes toward paying debts. Generally, the higher the ratio, the higher the perceived risk. Loans with higher risk are generally priced at a higher interest rate. See related question about Debt-to-Income Ratio.

84. Decedent

A deceased person, ordinarily used with respect to one who has died recently.

85. Deferred Payment

A payment postponed until a future date.

86. Delinquency

A debt that was not paid when due.

87. Demand Deposit

A deposit of funds that can be withdrawn without any advance notice.

88. Deposit Slip

An itemized memorandum of the cash and other funds that a customer presents to the bank for credit to his or her account.

89. Derogatory Information

Data received by a creditor indicating that a credit applicant has not paid his or her accounts with other creditors according to the required terms. See related questions in Credit Reports.

90. Direct Deposit

A payment that is electronically deposited into an individual’s account at a depository institution.

91. Direct Dispute

A dispute submitted directly to the furnisher about the accuracy of information in your consumer report that relates to an account or other relationship you have with the furnisher. See related questions about Credit Disputes.

92. Disclosures

Certain information that Federal and State laws require creditors to give to borrowers relative to the terms of the credit extended.

93. Draft

A signed, written order by which one party (the drawer) instructs another party (the drawee) to pay a specified sum to a third party (the payee), at sight or at a specific date. Typical bank drafts are negotiable instruments and are similar in many ways to checks.

94. Drawee

The person (or bank) who is expected to pay a check or draft when it is presented for payment.

95. Drawee Bank

The bank upon which a check is drawn.

96. Drawer

The person who writes a check or draft instructing the drawee to pay someone else.

97. Electronic Banking

A service that allows an account holder to obtain account information and manage certain banking transactions through a personal computer via the financial institution’s Website on the Internet. (This is also known as Internet or online banking.)

98. Electronic Check Conversion

Electronic check conversion is a process in which your check is used as a source of information-for the check number, your account number, and the number that identifies your financial institution. The information is then used to make a one-time electronic payment from your account-an electronic fund transfer. The check itself is not the method of payment.

99. Electronic Funds Transfer (EFT)

The transfer of money between accounts by consumer electronic systems-such as automated teller machines (ATMs) and electronic payment of bills-rather than by check or cash. (Wire transfers, checks, drafts, and paper instruments do not fall into this category.) See related questions about Electronic Transactions.

100. Embezzlement

In most states, embezzlement is defined as theft/larceny of assets (money or property) by a person in a position of trust or responsibility over those assets. Embezzlement typically occurs in the employment and corporate settings.

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