Personal banking isn’t one of the more intuitive parts of life. In fact, it can be really confusing — especially considering the fact that banks aren’t the best at communicating certain things — like all the fees you’re paying and which services you can opt out of in order to save.
But with a little guidance and the right information, you can get a good understanding of this crucial aspect of your financial life — and ultimately, that will allow you to decide whether it’s time to find a new bank that better fits your needs.
So instead of trying to interpret the banking world’s complicated definitions, we’ve put together a cheat sheet of some of the key terms and phrases that you need to know.
11 banking terms that impact your money
1. Compound interest
First, you need to understand compounding — this is the process in which the value of an investment (the money you invest or put into a savings account) increases over time.
Compounding is what allows your money to grow exponentially — as the original amount of money you invest earns interest, the total amount increases (original + earned interest), and then that bigger sum of money earns more interest — and so on. So as the total amount grows, so does the amount of interest that’s added to it — allowing your total sum of money to increase exponentially over time.
Compound interest is the addition of interest that’s added to the original deposit (investment) or loan amount. When interest is added to the principal (original amount), that total sum increases. As that total sum increases, interest is then added to the total sum + previously earned interest. That is what allows your money to grow exponentially over time.
One of the most important things to understand about money is that a dollar today is worth more than a dollar tomorrow. The time value of money assumes a dollar now is worth more than a dollar in the future, because of variables such as interest rates and inflation.
If you have $100 and do nothing with it, the value of that money will decline as time goes by. But if you put that $100 into a savings account or other type of investment account, it will start to earn interest, and that $100 will grow into a much bigger sum of money as interest is applied to the larger, total amount over time.
How it affects your savings
Compound interest is an extremely powerful force that allows investors to earn exponentially larger gains on their money over time. For example, when you invest money into a savings account, the money earns interest, which is added to the principal sum (the total chunk of money in the account). Then over time, as more interest is added that chunk of money (that’s already been growing from added interest) it continues to grow by bigger amounts.
Here’s a simple example: You invest $1,000 today and earn an annual 5% gain, so $50. That $50 is added to the principal amount of your investment, and then next year, you earn a 5% gain on $1,050, so you earn $102.50. And so on…
2. APR: Annual percentage rate
Your credit card has an annual percentage rate (APR) — which is essentially the price you pay to borrow money from the bank to charge purchases on the card.
Credit card companies are required to clearly state the interest rate as a yearly rate before customers sign an agreement, and that’s where the term APR comes in. It gives consumers a way to compare offers from various lenders.
A credit card company may also advertise its rates based on a monthly basis, which just gives you a breakdown of the APR. So if the monthly rate is 2% — 2% x 12 months = 24%. (Just for context, 24% is a high APR.)
However, you don’t even need to worry about the APR if you use your credit cards responsibly — meaning you pay off the balance in full, down to $0.00, every month before the due date. That way, you never have to pay any interest on the money you charge to the card.
3. APY: Annual percentage yield
Annual percentage yield (APY) refers to the money you earn on a deposit [like into a savings account or CD (certificate of deposit)] over a year — taking into account compound interest.
So let’s say you put $1,000 into a savings account with an APY of 1.20% that compounds daily — and then you contribute $25 a month for the next 12 months.
After a year, the balance in the account would be $1,313.87. If you contribute $100 a month, you’d have $2,219.28 after 12 months.
Bonus tip: For years, earning much money on savings was pretty much impossible.
However, after the Federal Reserve announced the year’s second interest rate hike in June — raising the benchmark interest rate by 0.25% to a range of 1% to 1.25% — online banks began increasing interest rates on savings accounts.
So right now, you can potentially earn about 100x more on your savings at an online bank, compared to having your savings at one of the big, traditional banks — which currently offer only about 0.01% interest on savings accounts.
4. Checking account
A checking account is basically a bank account that allows you to easily access your cash. With a checking account, you deposit money into the account and then you can use a debit card to make purchases and withdraw cash. You can also write checks that withdraw money from the account.
There are typically very few, if any, restrictions on how often you can access your money — however, some banks place daily limits on the amount you can withdraw from an ATM.
Some banks, typically big traditional banks, will charge you a monthly fee on checking accounts. This type of “maintenance” fee is bogus and just another way for big banks to get more of your money.
There are plenty of banks, credit unions and online banks that offer free checking. So make sure you do a little research before opening an account.
5. Savings account
A savings account is a great place to stash emergency savings, as well as short-term savings (money you may need within the next five years or so).
A savings account gives you easy access to cash, which is why it’s a great option for your emergency funds — you can quickly and easily withdraw the cash you need to cover any emergency that pops up, like an unexpected car repair or medical bill.
It’s also a great place to keep your short-term savings, like money you may need for a down payment on a house or to buy a car — because you don’t want to put that money at risk. The cash may not earn a ton of interest, but it will be safe in a savings account for when you need it.
You typically don’t have restrictions on how much and how frequently you can deposit money into a savings account, but some banks do have limits on withdrawals.
Where to find the best savings accounts
Online banks right now are offering much higher returns on savings than traditional banks.
In fact, with an online bank, you can currently earn about 100x more on your savings compared to the big, traditional banks — which currently offer only about 0.01% interest on savings accounts (which is kind of insulting).
According to Bankrate, here are just a few of the highest rates available on accounts that don’t require a minimum deposit:
- Barclays: 1.20%
- Synchrony Bank: 1.20%
- Ally Bank: 1.20%
- American Express Bank, FSB: 1.15%
6. Certificate of deposit
Certificates of deposit — also called CDs — are deposit accounts that require you to commit your savings for a specified period of time, which may be anywhere from one month to several years — meaning you can’t withdraw the money without paying penalty fees.
In many cases, the longest CD term banks offer is five years. In exchange for that long-term commitment, you will typically earn a higher interest rate than you would on a savings account. However, unlike in a savings account, your money is not available any time you want it.
If you withdraw from a CD before the specified term, you will typically have to pay a penalty. So you want to make sure that the money you invest is cash you know you won’t need for that period of time.
Money Expert Clark Howard suggests you take the money you want to invest and buy five different five-year CDs. So split the money into five even piles — then buy 1-year, 2-year, 3-year, 4-year and 5-year CDs in equal amounts. That gives you some flexibility on when you can get access to the cash.
The typical CD contract only calls for a 90-day interest penalty — which means if you withdraw the money before the predetermined date, you’ll have to pay a penalty of 90 days interest. So if you hold a CD for any length of time, the higher return on a 5-year CD should in theory compensate for the forfeit of 90 days interest.
But in general, to get the most out of a CD, you really don’t want to withdraw the money until the set date — allowing you to earn the most money as possible on the investment.
If you’re wondering: “Well, why not buy just one 5-year CD instead?” Here’s why: If you just need a portion of the money, you have to cash the entire CD in and start over again. Having five different ones gives you the same kind of flexibility you would have with traditional CD laddering
If you think you may need to withdraw early…
To be sure you don’t end up paying too much in penalties in the case you need to withdraw the money early, make sure the CDs you get only call for the standard 90-day interest penalty. Stay away from anything with a 180-day interest penalty. Do that homework upfront and this could work out nicely for you.
7. FICO Score
There is one source and one source only for your true credit score — the Fair Isaac Corporation. Your true credit score is known as your FICO score.
Your FICO score is a number between 300 and 850 that evaluates your risk as a borrower. Since the number is based on how well, or poorly, you’ve managed your money obligations over time, lenders use it determine how big of a loan they think you can handle and the likelihood that you’ll pay it back.
Since FICO dominates the credit score market, the three main credit bureaus (Equifax, Experian and TransUnion) started selling their own version called a VantageScore. This is just one of the many other scoring systems trying to compete with the FICO score.
But the score you want to focus on is your FICO score!
You have a FICO score with each of the three main credit bureaus. Each bureau’s score will vary slightly because of differences in the way they compile information on you. But they’ll all be similar in range. (The credit score most used by lenders is the Equifax FICO score, but it really depends on the lender.)
8. Overdraft ‘protection’ & fees
According to the Consumer Financial Protection Bureau (CFPB), banks made about $11.2 billion in overdraft and non-sufficient fund fees in 2015.
The way an overdraft fee works is if you make a transaction that drops your account balance below zero, the bank covers the difference, or puts your account into negative funds — and then charges you a fee for it — typically around $35. Plus you also owe the bank the difference.
Overdraft “protection” programs typically cover checks, recurring online transactions, debit card transactions, and in some cases, everyday debit card and ATM transactions.
Most U.S. banks (84% of the largest) allow customers to overdraw their accounts when they don’t have enough money to cover a transaction, according to a report by the Pew Charitable Trusts.
And the $35 fee typically isn’t caused by a big purchase — in fact, the CFPB found that the median transaction amount that generates this type of fee is just $50 — and for debit card transactions, a mere $24.
Talk about a huge waste — and a waste most people don’t even realize they can avoid.
How to avoid overdraft fees: Opt out!
A big part of the reason why this costs consumers so much money is because many don’t realize they can opt out of “overdraft protection” — which is just the bank’s way of saying it will “protect” you by paying for something you can’t afford and all you have to do is pay a huge fee for the “service.”
So let’s be clear: Overdraft protection is just another costly bank fee that protects you from nothing — and most people don’t even want it — the bank may automatically enroll you without you realizing it.
In fact, Pew found that more than two-thirds of people who consistently overdraw their account would rather have the transaction declined, but they didn’t know that was an option. Because of course the bank isn’t going to tell you that part.
So if you don’t want to risk getting charged overdraft fees, you have the right to refuse overdraft protections. Just contact your bank and tell them you want to opt out.
If you don’t have enough money in your account to cover a purchase, the transaction will be declined — but you will avoid owing the bank the difference in the amount plus the extra $35 fee.
This is why checking your accounts daily is crucial — not only to spot errors and potential fraud, but to also know how much money you have in your account — so you can make spending decisions accordingly.
A lot of people are enrolled in overdraft protection without even realizing it. So if you aren’t sure, it’s important to check with your bank. And even if you are signed up for it, you can always opt out at any time!
9. Non-sufficient funds fee (NSF)
Banks charge a non-sufficient funds fee (NSF) when you don’t have enough money available in your checking account to cover a transaction.
Here’s how Bank of America explains its NSF terms: “When you do not have enough available funds in your account to cover an item, and we decline to pay or return the item unpaid (a returned item), we will charge an NSF: Returned Item fee for each returned item.”
Here’s what that means:
If you write a check or pay a bill electronically from your checking account for an amount that exceeds the balance — your bank will likely charge you a non-sufficient funds fee. An NSF may also result from an automated bill payment if the amount you owe (the amount the company tries to deduct from your account) exceeds your account balance.
So let’s say you write a check for more money than you have in your checking account. When receiver tries to deposit it, the check “bounces” — which means the bank declines the transaction, or transfer of funds, and then charges you a fee (NSF) for it. You may also get charged a fee by the receiver, since they likely got hit with a “bounced check” fee as well.
For example, Wells Fargo charges $35 per bounced check (or declined bill payment) if your bank account balance is overdrawn by more than $5. Here’s a look at some of the other fees Wells Fargo charges its customers.
10. Returned deposited item (RDI)
A returned item (or returned deposited item), also known as an RDI, is a check or recurring payment that the bank declines to honor (or process) — typically because you don’t have the funds in your account to cover the amount.
Here’s Wells Fargo’s policy on returned items:
When a transaction such as a check or recurring payment is presented for payment and returned unpaid because the available balance in your deposit account is less than the amount of the transaction (sometimes called a “bounced check”), a Returned Item (NSF) fee will apply. (At Wells Fargo, the fee is $35 per returned item.)
Here’s what that means:
If you write a check, or a recurring payment tries to go through on your account, and it is returned, it means your bank won’t pay the company or individual to whom you wrote the check or owe the bill.
Here are a few reasons why a deposited item or check can be returned:
- There’s not enough money in your checking account (insufficient funds) to cover the amount for which the check was written.
- A stop payment was placed on the check.
- The account was closed before the check could process.
- The check was written at some point in the past that the bank considers too old to honor.
- The check was written improperly — which could mean the signature is questionable or missing.
Back in the day, you could write a check for an amount that exceeded your account balance — knowing it would take a couple of days to process and you would have time for other funds to show up or be deposited into your account. So when the check did go through, you’d have enough money in the account to cover the amount for which you wrote the check.
But since most payments, including checks, are now processed electronically — and go through immediately — consumers no longer have that flexibility. Plus, many bills are now paid on a recurring payment schedule, which means on a set day every month, that charge is going through no matter what.
What happens when you write or receive a bad check
Whether you write or receive a non-sufficient funds (NSF) check (also known as a bounced check), you will owe a fee or even multiple fees.
If you write a check that bounces: you will not only owe fees — to both your own bank and the recipient of the bounced check — but you’ll also still owe the original check amount.
When it comes to the fees associated with a bounced check, you will likely owe your bank an NSF fee (typically $35), and on top of that, the recipient of the bounced check may also charge you a fee, somewhere between $20 and $40, or a percentage of the check amount.
If you fail to pay the recipient the amount of the original check and any fees that incurred, the recipient could involve a collections agency. At that point, you risk major damage to credit and credit score.
If you receive and deposit a check that bounces: you will owe your own bank a fee for returning the check. Plus, if you don’t realize the check didn’t process, you could end up over-drafting your account by continuing to charge purchases while assuming the money was in there.
How to avoid a returned-item fee
Check your accounts daily! This not only helps you keep up with your spending, but it also allows you to know exactly how much money is in your account — so you can avoid writing checks that bounce and make sure there’s enough in there to cover any recurring bill payments have you set up to go through every month.
You can also set up alerts through your bank or credit union, so they will text or email you when your account balance drops below a certain amount.
With some banks, you can avoid a bounced check or overdrawing your account by transferring funds the same business day the transaction is set to go through (if you realize your balance won’t cover the check you wrote or a recurring charge).
11. Key banking numbers
There are a few numbers that are associated with your bank and your specific accounts that you should know and understand.
Routing number: A routing number is a 9-digit number that’s used to identify the U.S. financial institution (bank, credit union etc.) that holds the account. Routing numbers are most commonly used for wire transfers and automatic bill-pay withdrawals.
So your bank has its own specific routing number that allows checks and other payments/transactions to go to, or originate from, the right place. Some banks may have multiple routing numbers for different purposes, locations and/or specific branches. Plus, some banks also have different routing numbers for electronic and paper transactions.
It’s important to make sure you’re using the correct routing number if you’re doing an online money transfer or payment.
Account number: Each of your accounts has a specific number associated with it, whether it’s a checking account, savings account or other type of financial account.
Where to find these numbers
You can find your routing and account numbers on your statements, through your online account or on your checks.
Here’s each number on a check: