Glossary of Banking and Credit Terms

Be familiar with these basic banking and credit terms. Knowing and understanding the terms that are on your bank and credit card statements can possibly save you dollars every month.

  • Account Reconciliation - The act of confirming that the balance in one's checkbook register matches the corresponding bank statement.
  • Adjusted Balance method - A technique for calculating finance charges (such as in a bank account, charge account, or credit card account) based on the account balance remaining after adjustments are made for payments and credits during the billing period. Interest charges are usually lower under this method than under other methods, such as average daily balance and previous balance methods.
  • Automated Teller Machine (ATM) - A machine at a bank branch or other location which enables a customer to perform basic banking activities (checking one's balance, withdrawing or transferring funds) even when the bank is closed.
  • Automated Clearing House (ACH) - A nationwide electronic funds transfer network which enables participating financial institutions to distribute electronic credit and debit entries to bank accounts and to settle such entries.
  • Average Daily Balance method - A technique for calculating finance charges (such as in a bank account, charge account, or credit card account) based on average balance that existed each day. Interest charges under this method are usually higher than the adjusted balance method but lower than the previous balance method.
  • Balance -The amount of money in an account, equal to the net of credits and debits at that point in time for that account.
  • Bank Credit - The borrowing capacity provided to an individual by the banking system, in the form of credit or a loan. The total bank credit the individual has is the sum of the borrowing capacity each lender bank provides to the individual.
  • Bounced Check - A check which a bank returns because it is not payable due to insufficient funds.
  • Cash Reserves - Cash deposits, short-term bank deposits, money market instruments, and Treasury bills.
  • Certificate of Deposit - A short- or medium-term, interest-bearing, FDIC-insured debt instrument offered by banks and savings and loans. CDs offer higher rates of return than most comparable investments, in exchange for tying up invested money for the duration of the certificate's maturity. Money removed before maturity is subject to a penalty. CDs are low risk, low return investments, and are also known as "time deposits, because the account holder has agreed to keep the money in the account for a specified amount of time, anywhere from three months to six years or more.
  • Certified Check - A check for which the bank guarantees payment.
  • Check - A negotiable instrument drawn against deposited funds, to pay a specified amount of money to a specific person upon demand.
  • Checkbook Register - An informal record of all deposits to and withdrawals from a given checking account. A checkbook register is used to perform account reconciliation.
  • Compound Interest - Interest which is calculated not only on the initial principal but also the accumulated interest of prior periods. Compound interest differs from simple interest in that simple interest is calculated solely as a percentage of the principal sum.
  • Credit Card - Any card that may be used repeatedly to borrow money or buy products and services on credit. They are issued by banks, savings and loans, retail stores, and other businesses.
  • Demand Deposit - An account balance which can be drawn upon on demand, i.e. without prior notice. Checking and savings accounts are examples of demand deposit accounts.
  • Direct Deposit - The deposit of funds directly into a bank account as a form of payment. Common uses for direct deposit include paychecks and tax refunds.
  • Electronic funds Transfer (EFT) - Any transfer of funds that are initiated by electronic means, such as an electronic terminal, telephone, computer, ATM or magnetic tape.
  • Federal Deposit Insurance Corporation (FDIC) - A federal agency that insures deposits in member banks and thrifts up to $100,000.
  • Overdraft protection - A checking account feature in which a person has a line of credit to write checks for more than the actual account balance. Instead of charging the non-sufficient fund fee for bouncing a check, overdraft protection will in effect provide the account holder with an instant loan. The interest rate will be extremely high, but if it is paid off quickly it is usually much less expensive than the bounced check fee. Some banks do charge a fee when an account balance falls below zero even if the account holder has overdraft protection, but it's still significantly less than the bounced check fee.
  • Passbook - A book issued by a bank or savings institution to record deposits, withdrawals, and interest earned in a savings account.
  • Savings Account - A deposit account at a bank or savings and loan which pays interest, but cannot be withdrawn from by check-writing.
  • Simple Interest - The interest calculated on a principal sum, not compounded on earned interest.
  • Stop Payment - An order to a bank not to honor the payment of a check after it has been delivered but before it has been cashed.
  • Wire Transfer - An electronic transfer of funds, such as one that is made over the Federal Reserve Wire Network.

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