Have you ever read the fine print of your bank statement or an application for a loan or bank account and found yourself wondering just what all the terminology really means? We know it can be intimidating! At Milli, we want to ensure that our customers feel confident and informed so that nothing comes as a surprise when it comes to your financial situation. So to help your confidence with banking, we’ve compiled this list of the most common terms that we think you should know, and provided definitions you don’t need a finance degree to understand!
Understanding these terms can also make a big difference, too! According to a National Financial Educators Council survey, Americans lost an estimated average of $1,819 in 2022 due to a lack of financial knowledge – a total of more than $436 billion. You may be able to save yourself some missteps once equipped with more know-how about some core banking terms.
Let’s dive in!
APY (Annual Percentage Yield)
The amount of interest you earn on the money in your bank account. Most savings accounts and some checking accounts have one. The higher, the better! A few tips:
- Be sure to understand how this interest is paid out (monthly, annually, etc.) and if there are any thresholds or tiers you have to meet in order to be eligible.
- Be sure to read the fine print! Many institutions promote high rates that are only available for a limited time or after an account is active for a specific period of time – practices that we do not support at Milli!
ACH (Automated Clearing House)
The ACH network is the primary system that banks, businesses, and individuals use to send money electronically. The most well-known example is when your work paycheck is automatically direct deposited (see below for this definition) into your account via ACH. Other examples include direct payment of bills, business-to-business payments, government benefit payments (social security, welfare, etc.), and preauthorized transfers.
APR (Annual Percentage Rate)
The total cost of taking out a loan or borrowing money. For example, both credit cards and loans, such as auto and home loans, carry an APR. Lenders are legally required to disclose the APR on any loan so that customers understand the total cost of borrowing money.
Available Balance
The amount of money in an account that is available to be spent, invested, withdrawn, etc. It usually takes some time for checks and purchases to clear, meaning that if you recently deposited money or made a purchase, those will show up as “Pending” and are not yet included in your available balance.
Billing Cycle
The interval of time between billing statements. Billing cycles are most common on a monthly basis but can vary in length. Knowing your billing cycle is important to help you stay on top of payment due dates and manage your budget.
Billing Date vs. Payment Date
The billing date is the day your monthly statement is generated each month. This is also commonly referred to as your statement closing date meaning all purchases/charges after the date will be accounted for during the next billing cycle. This is separate from your payment date, which is when your monthly payment is due. Your billing date typically will occur approximately 20-25 days before that payment date.
Compound Interest vs. Simple Interest
Simple interest is fairly straightforward – it is calculated only on the principal, or the original, amount of a loan. Compound interest, on the other hand, is calculated on the principal amount AND any interest that has accrued over time. It’s important to ensure that you are familiar with the types of interest associated with any loans or interest-earning accounts you have.
Credit Card
Allows you to make purchases by borrowing money from the card issuer up to a certain limit (a.k.a. your credit limit) and paying it back on or before your payment date.
Credit Score
A number typically between 300-850 that measures your creditworthiness based in part on your credit report and history. Again, the higher, the better! Banks and other financial providers utilize credit scores to determine if a customer qualifies for a credit card or loan and at what rate. It’s also a factor in many rental housing applications. One of the best-known types of credit scores is the FICO® score. It’s important to know your credit score and monitor it closely to detect suspicious activities.
Debit Card
A payment method connected to your checking account. When you make a purchase with your debit card, the bank automatically takes the funds from your account to make the payment.
Direct Deposit
An electronic and automatic payment, usually a paycheck, that is deposited into your account. This eliminates the need to endorse and deposit physical checks.
EFT (Electronic Funds Transfer)
A method of transferring money by consumer electronic systems (ex. ATMs) between people, banks, or businesses. This also does not require the use of paper checks.
FDIC (Federal Deposit Insurance Corporation)
The FDIC is an agency of the federal government that works to protect bank customers and maintain stability in the nation’s financial system. The FDIC insures deposits of all national and state banks that are members of the Federal Reserve System. Learn more about the FDIC here. As a reminder, Milli is FDIC insured!
Insufficient Funds
When an account balance does not have enough money to cover the entirety of a payment request that has been made. When paper checks were the norm, this was commonly referred to as “bouncing a check.”
Money Market Account (MMA)
An interest-bearing account that typically pays a higher interest rate than typical savings accounts and often includes the check-writing and debit card features that checking accounts offer.
Overdraft
Similar to insufficient funds, an overdraft occurs when there isn’t enough money in an account to cover a transaction, but the bank allows the transaction to occur and pays for the transaction anyway. Many banks offer overdraft protection to help avoid any associated overdraft fees.
We hope this was helpful. Are there other banking topics that you’re not quite sure what they mean? Let us know! For a larger glossary of top banking terms from the Office of the Comptroller of the Currency, click here.
Keep reading on the Milli Blog:
How to Cover Unexpected Expenses
Aspirational Spending: What is it, and how to Combat It
How to Avoid Bank Scams and Mitigate the Risk of Bank Fraud
