Key Banking Terms You Need to Know

Banking and finance lingo isn’t always easy to understand, particularly if you’re a newbie. By understanding what the basic terms mean, you can bank a lot smarter. So, here’s a look at some of the most common banking terms.

Routing Number

This is a nine-digit number that helps identify your bank. If you have an account in a larger bank, you may have a specific routing number that is based on the branch location.

FDIC

The Federal Deposit Insurance Corp. is a government-run institution that insures people’s bank deposits of up to $250,000, which can come in handy if the bank fails. If you have an account with a credit union, the National Credit Union Administration is the equivalent body.

Certificate of Deposit

A certificate of deposit, or CD, is an account into which you’ll need to deposit a certain amount of money and keep it there for a particular period. Given this, a CD usually pays higher rates compared to a checking or savings account.

APY

The APY refers to the annual percentage yield. This is the amount of interest you gain from keeping your cash in an account for a whole year, including the compound interest. In contrast, the APR, or annual percentage rate, is the amount of money you’ll gain from keeping your money in a certain account for a whole year, not including compound interest.

Compound Interest

Compound interest is interest that applies to the original cash deposit you made as well as to any newly earned interest. For instance, say you deposited a sum of $1,000 in your account, and the sum will earn a compound interest of 5% in a year. The next year, you would have $1,050. The following year, you will earn a 5% interest on $1,050 (instead of $1,000), and so on.

Overdraft Fee

This is the fee you incur if your checking account does not have sufficient funds to cover a payment that you charged to your card. In this case, your bank or credit union will pay the balance and charge you an overdraft fee for the service.