Essential Banking Terms and Definitions

The total amount of money present in a financial account, such as a checking or savings account. The available balance refers to the funds currently accessible for withdrawal or use, while the current balance may include pending transactions that have not yet cleared.

The effective annual rate of return taking into account the effect of compounding interest. Unlike the simple interest rate, APY provides a more accurate picture of how much interest an account will earn over a year, assuming funds remain in the account for a full 365-day cycle.

An electronic banking outlet that allows customers to complete basic transactions without the aid of a branch representative or teller. Common transactions include cash withdrawals, balance inquiries, and deposit transfers. Some ATMs offer additional services such as bill payments and stamps.

A savings product that pays a fixed interest rate for a specified period of time. CDs are generally considered low-risk investments because they are insured by the FDIC up to applicable limits. Funds are typically locked in for the term, and withdrawing money early often results in a penalty.

An asset that a borrower offers to a lender to secure a loan. If the borrower fails to repay the loan, the lender has the right to seize the collateral to recover the losses. Common examples of collateral include real estate, vehicles, and cash savings.

Interest calculated on the initial principal and also on the accumulated interest of previous periods. Think of it as "interest on interest." This allows wealth to grow at a faster rate compared to simple interest, which is calculated only on the original principal.

A numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. Lenders use credit scores to evaluate the potential risk posed by lending money to consumers and to mitigate losses due to bad debt. Higher scores indicate better credit health.

A payment card that deducts money directly from a consumer's checking account to pay for a purchase. Unlike credit cards, debit cards do not allow the user to borrow money from the issuer; the funds must be available in the account at the time of the transaction.

An electronic payment from one bank account to another. Commonly used by employers to pay employees, direct deposit automatically transfers salaries, benefits, or tax refunds into the recipient's checking or savings account, eliminating the need for paper checks.

Insurance provided by the Federal Deposit Insurance Corporation (FDIC) that protects depositors against the loss of their insured deposits if an FDIC-insured bank or savings association fails. Standard insurance amount is $250,000 per depositor, for each account ownership category, at each insured bank.

The amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets. Interest rates are typically noted on an annual basis, known as the annual percentage rate (APR). For savings accounts, the bank pays the customer interest in exchange for keeping their money.

A flexible loan from a bank or financial institution. Similar to a credit card, a line of credit gives borrowers a preset credit limit from which they can draw funds as needed. The borrower pays interest only on the amount of money actually used, not the full credit limit.

The efficiency or ease with which an asset or security can be converted into ready cash without affecting its market price. Cash is considered the most liquid asset, while real estate and fine art are considered relatively illiquid.

The minimum amount of money that must be kept in an account to avoid paying fees or to earn interest. Some bank accounts require a daily minimum balance, while others require an average monthly balance to qualify for fee waivers.

A loan used to purchase real estate, where the property itself serves as collateral for the loan. The borrower agrees to pay back the lender over a set period of time, typically 15 to 30 years, with a predetermined interest rate.

An extension of credit from a lending institution that is granted when an account reaches zero. An overdraft allows the individual to continue withdrawing money even if the account has no funds in it. Banks typically charge a fee for this service, known as an overdraft fee.

In the context of loans, the original sum of money borrowed or invested, separate from any interest or charges. In the context of investing, the principal is the amount of money originally invested, separate from earnings or dividends.

A nine-digit code used by financial institutions in the United States to identify the specific financial institution responsible for the payment. It is used when transferring money between banks, specifically for wire transfers, direct deposits, and electronic checks.

A deposit account held at a bank or other financial institution that provides principal security and a modest interest rate. Savings accounts are designed for storing cash that you do not need immediate access to, unlike checking accounts which are often used for daily transactions.

An agreement between a buyer and a seller to exchange goods, services, or financial instruments. In banking, this commonly refers to any activity that affects the account balance, such as deposits, withdrawals, debit card payments, and checks.

An electronic transfer of funds across a network administered by hundreds of banks around the world. Wire transfers allow for the individualized sending of money from one bank account to another on a same-day basis, making them a fast method for sending large sums.