A Personal Bankers Take On Basic Banking Vocabulary Terms everyone should know to Increase their financial confidence.
If you want to improve your money management skills, you should start with familiarizing yourself with financial terms and increasing your financial vocabulary.
This allows you to build from the ground up and gain a stronger understanding of your financial future.
If it weren’t for my years in the banking industry, I don’t think I would have stepped into the realm of increasing my own personal finance knowledge. Thanks to my job, I learned quite a few valuable things that I will share with you here today.
When I was introduced to my first experience as a personal banker, I didn’t have any prior experience, nor did I have much education in the space either. I nailed the interview due to my management experience and my boss was willing to roll the dice on me and train me from the ground up.
Where did we start?
Basic banking vocabulary words.
We took it ALL the way back to the beginning. The basics. While some were so obvious, we still reviewed them to ensure we fully understand how other products work closely together.
Looking back now, I realize that these are financial terms everyone should know.
The problem is, we don’t learn this in school and we are not really taught all of this by our parents (unless your parents are bankers or extremely financially literate themselves).
I witnessed this firsthand, after meeting new clients and realizing there was a-lot of basics they weren’t familiar with. Because of this, I was able to use my training and knowledge to help them build their financial literacy from the ground up—just like my first banking manager did with me.
The goal here, is to introduce these financial vocabulary terms (if you haven’t already been introduced), and give you a quick and effective starting point so you can go and expand on them yourself.
Here Are 48 Basic Banking and Financial Terms Everyone Should Know:
Checking Account
A checking account is an account that is held at a bank which you can use to manage your everyday expenses.
Your checking account is the actual holding place of your money where you can make deposits(add money) and withdrawals (take money out).
Savings Account
Savings Accounts come in many different forms and with different features attached to them. In the end, they are essentially used for people to save money.
Savings accounts are used for people to save money for whatever their hearts desire. With savings accounts, there is usually a restriction attached to them on how many times you can withdraw money or debit the account in some form.
The whole point of savings accounts is to save money and keep it there growing over time, until the point where you need it.
As money sits there, you want to ideally gain as much interest on that money as possible.
Deposit
A deposit is anytime you are adding money into your bank account(s).
So, if you are taking money to your local bank to add to your account balance, you are going to let the bank tellers that you “want to make a deposit.”
Debit or Withdrawl
In the banking industry, there are two terms that people use when referencing to taking money out of your account.
A debit or withdrawal is any money that is in some way, shape, or form leaving your account. This can include taking money out at the ATM, paying a bill, or making a purchase.
Anytime money is leaving your account, it is either being debited or withdrawn.
Beneficiary
In the banking industry, a beneficiary is a designated person(s) who receives monetary advantage from an owner(s) account.
This is an important term to know, because everyone who owns an account should have one.
Tomorrow is never promised.
Anytime you open an account and are going to be maintaining or growing funds, you should always assign a beneficiary if possible.
This makes things so much easier for your loved ones who would receive benefit when you pass.
A beneficiary cannot inquire on any information on an account. They cannot have access, view balances, or receive answers to questions they may have unless, the owner(s) of the account are present to provide consent.
Trust Account
Now, this term you probably won’t be using often, but it is still a term you should know in the personal finance space.
According to Legal Zoom, a Trust Account is a legal arrangement through which funds or assets are held by a third party (the trustee) for the benefit of another party (the beneficiary).
Trust Accounts serve valuable purposes in the financial space. A trust account provides you control over your estate. Most of my clients cannot define them or understand their purpose and function. It’s a good term to research and expand on.
Collateral
In banking, collateral is basically the bank holding your valuables such as a property, or cash in an agreement upon the bank lending you money.
This is often seen in small personal loans. The banks don’t want to take unnecessary risks, so they will hold collateral in the event the the borrower does not pay in good faith, the bank does not lose out on their money.
Authorized Signer
An authorized signer is an individual(s) who is added to an account and the primary owner of that account has granted that individual(s) access to conduct transactions and manage the account on their behalf.
If you are going to the bank to open an account, this term may pop up. It’s better to have an understanding of how to handle your personal banking scenario, than to have to rely on the banker.
While a bankers job is to inform and teach their clients, there are a few out there that can’t or won’t and make you responsible for knowing.
Sole Ownership & Joint Ownership
Sole ownership is when you own an account and there is nobody else on that account with you—you are the sole owner.
Joint ownership on the other hand, is when you open an account with someone else or you choose to add someone else onto your account. That account now becomes a joint ownership account.
Banking Fact: If you open an account with another person and create a “joint account”, that other person can take out all of the funds in that account, close it, and you never have a say. Moral of the story—if you are not married, you should be careful who you share your bank account ownership with. From my years in banking, I have seen this happen many times to people who did it with great intentions, only to get screwed because they did not know this.
Co-Signer
This is a term that pops up when you are looking to apply for a loan or credit card. A co-signer is someone who signs with you jointly for any lending need.
Why would you have a co-signer?
If you want to qualify, but you need some assistance, a co-signer can help you. A co-signer basically takes full responsibility for any obligated debts if you fail to make your payments.
In addition, a co-signer can use their credit health to help you get approved. An example of this, is a parent co-signing a car loan for their child.
Working in a bank, I have seen some tragic financial nightmares and often times there is an innocent bystander (the co-signer) who pays the price.
If you are going to co-sign for someone, take some time to give it some serious thought and consideration. Educate yourself on the possible consequences that you could incur if payments are not made.
Witnessing these scenarios, as a banker, I’d be incredibly selective to who I’d co-sign for.
You can never guarantee that someone else will make payments on time. If you co-sign, you are taking on that debt.
So, unless you are willing to gamble your credit and financial future, I’d stay out of this territory.
Principal Payments
If you decide to go and apply at your local bank for a loan, you may want to get familiar with interest payments and principal payments. Principal payments refers to payments being made to the actual money borrowed that does not include the bank’s interest.
Example:
- $10,000 car loan with a 5.00% Interest rate you have a car payment equaling (roughly) = $190.00
From that $190.00 car payment that you are making on a monthly basis, the bank takes the interest and the rest gets applied to principal.
Your money after the interest is deducted, is what is called the principal payment (payment being made to the loan amount that does not include the bank’s interest).
Closing Costs
Not asking enough questions about closing costs can be the difference from closing the deal or backing out. If your banker is not bringing these up to your attention, then you need to back yourself up by knowing what they are.
Closing costs, are any costs that the bank needs to charge you for using their services.
If you are you are doing a real estate transaction with a bank, you can typically expect closing costs.
Sometimes personal loans and personal lending products have closing costs and other similar fees. Look out for these, and compare with other financial institutions.
IRA – Individual Retirement Account
IRAs are great financial vehicles to learn about early on in life (as soon as you start your first job).
An individual retirement account (IRA) is pretty much a sum of the name itself. It’s a taxed deferred retirement account that you create for yourself.
There are different types of retirement accounts, so if you are not familiar with IRA’s, I would strongly suggest you take some time to educate yourself on the different types of Individual Retirement Accounts beginning with a Roth IRA.
Establishing an IRA is a great tax deferred account that can dramatically change your financial future if started early enough and utilized properly.
401K
According to the Internal Revenue Service a 401K: is a qualified profit sharing plan that allows for employees to contribute a portion of their wages to individual accounts.
The best part of a 401K is that your employer can contribute and often match the earnings you decide to invest. Very often, people refer to it as “a retirement account that they have with their employer.”
If you are working for a company that offers a 401K plan and you are not enrolled, then you should write this down and create a reminder to enroll as soon as you possibly can.
You don’t want to be spending years of your time simply working for a salary. There is more that you are leaving on the table, which is why this is a financial term everyone should know.
Checks
According to Investopedia a Check is a signed and dated financial instrument that directs a financial institution such as a bank, to pay a given sum of money to the bearer (person or institution receiving the check).
A check is an effective way for someone to instruct their bank to move money from one account to the other. Types of checks include: personal checks, payroll checks (paychecks), cashiers checks (official certified check).
Checks at some point are going to become obsolete. Until then, we must know what they are and how they function.
Safe Deposit Box
Did you know that your local banks have the option to rent you a safe deposit box to store important documents, jewelry, and other valuables in?
I worked at multiple banks for years, and I can’t express how many of my clients had no clue the banks had such an option.
Today, we carry too many valuables that shouldn’t be stored in our home. These things include expensive irreplaceable jewelry, real-estate documents, life insurance and trust documents, passports and more. These types of possessions are examples of things that should be kept in a safe place incase of a fire or burglary.
Not all banks will offer a safe deposit box. It is dependent on the location of each branch and their overall size and capacity.
Next time you meet with your personal banker, you should inquire about safe deposit box fees.
Cashiers Check
This is a popular term that gets thrown around in the banking world frequently.
While us employees, know exactly what they are and how they function, most of our clients do not.
A cashiers check, is a money instrument that is issued by a bank.
Basically, it is a verified check backed by the bank where the funds displayed on the cashier’s check have been verified and validated prior to issuing.
The banks back these official checks with certainty, by verifying you have the money in the account to support these funds to begin with. Then the bank takes it a step further, where the funds are drawn off the bank’s ledger account and not yours.
You end up paying the bank back from your personal account once that check is cashed or deposited.
Money Order
A money order is another paper money instrument that allows for you to send money to a third party securely and inexpensively.
The issuer (bank) gets paid for the money order up front. This guarantees that the funds are collected up front and the money order good allowing the receiver to feel confident they will receive the face amount of the money order.
This can be a great option for someone who needs to pay someone but does not have a bank account. Also a great option when a payee needs immediate access to the funds.
CTR
CTR is an internal banking term and it stands for Currency Transaction Report. The reason I believe you should know this term, is because if you ever need access to $10,000 or more from your personal bank account in cash, you should be prepared to answer some questions at your local bank during your CTR process.
The banks take this step in order to properly document transactions over this amount, in order to prevent money laundering.
It’s just a good thing to know beforehand.
Overdraft
Often times, the banks make more money on fees than they do anywhere else. Overdraft charges, are the bread and butter of how banks make their money (along with maintenance fees). Which is why, you should be familiar with this term in order to avoid them from eating your hard earned money.
Yes, I say “them” because those suckers often come in a series of 2,3 and 4 (even up to 6) charges if you are not paying attention to your spending!
Say you have $500.00 in your account
You make a few charges this week of $300.00 (cautiously), in order to stick within your $500.00 available balance.
This leaves you with a $200.00 balance, after your purchases throughout the week have cleared.
But then, you forget that you have your car payment that is supposed to be deducted the next day in the amount of $300.00
You will now Overdraft your account by – $100.00
The bank will then charge you an overdraft fee ranging from $30- $36.00 (depending on your bank’s rules and regulations policies).
Grand total: you now have over-drafted your account and are negative – $136.00. 🤦♂️
Pro Tip: Set up alerts on your mobile banking that send you a notification when your account falls below a minimum balance.
You can also set up alerts on your online banking, so that if you were to overdraft your account by accident, you will get notified immediately and hopefully, you can pass by and make a quick deposit by the deadline to have the fee waived.
The banks can charge these $36.00 overdraft fees up to 6 times in 24 hours. If you are not aware and paying attention, you can lose quite a bit of money ($216 to be exact) in 1 day. This happens a lot more often than you think.
And believe me, to get that money bank is close to impossible (banks don’t like reversing these).
Credit Bureau
Everyone over the age of 18 needs to be well educated on term “credit”, and how it functions.
It is wise to begin with learning what the credit bureau is and which are the major ones.
This is key for understanding how credit works and knowing how to dispute derogatory marks on your credit report (if needed).
According to Credit Karma, a credit bureau is a department that collects your financial information and organizes it into a document called a credit report. Any business or enterprise with permission can take a peak at your credit report in order to make a lending decision.
There are 3 main credit bureaus that you want to recognize immediately: (Experian, Trans Union, Equifax).
Staying on top of your credit reports, will help you spot inaccuracies.
Credit
If you are new to credit, check out How To Improve Your Credit Score. There is some good information in there too if you are willing to go in a bit further on the subject.
Credit is something that takes time to establish and it needs to be done with intention. The more focused you are on your credit and the more educated you become on credit, the faster you can increase your FICO score.
Experian defines credit as the ability to borrow money or access goods or services with the understanding that you will pay it back later.
Credit is going to play a big role in your financial journey. Grow it, cultivate it and take care of it as much as you can.
From my personal experience, working in the banking industry — don’t lend your credit to anyone!
Credit Inquiry
I have had many clients who have wanted to apply for a credit card, but had no idea that would lead to a credit inquiry. In fact, I have had many clients who had no clue how credit even worked.
Before you pass by your local bank and they start selling you on some credit based products, you need to understand credit inquiries and how they affect your credit score.
Transunion (one of the major credit bureaus) defines a credit inquiry as, a credit check. That’s it.
Anytime you go to the bank, on the phone, online—whatever the situation may end up looking like, in order for you to receive a credit based product, (no matter what the sales rep makes it sound like), there will be an inquiry on your credit report.
Don’t let anyone convince you otherwise.
Derogatory Marks
Maybe you have already reached a lending need in your life, or maybe you just haven’t gotten to that point in your financial life just yet. What I can assure you is, that at some point, your are going to need for a financial institution or private lender to lend you some money.
This lending need can be for a home, a vehicle, a credit card and the list goes on. I have had clients face issues because of derogatory marks. For this reason, you want to be familiar with “Derogatory Marks” and how they affect your credit score.
Derogatory marks are not good, and you want to prevent having any of these on your credit report.
Credit Karma defines derogatory marks as: “negative indications on your credit report that can lower your score. These negative indicators can stay on your credit report for a substantial amount of time. In many cases these derogatory marks can stay on your credit report up to 7-10 years and depending on the type of event, even indefinitely.”
Early Withdrawal Penalties
This term usually has to do with some sort of savings plan. These savings plans, can vary greatly in their respective functions and benefits. Keeping it simple, when you put money into a savings accounts, most of them can come come with restrictions.
These restrictions are in place for a reason, so if you need access to your money from a savings account that is not meant to be touched within a specified time period, you will be assessed what is called an early withdrawal penalty.
Sometimes, these penalties can be waived and there are other circumstances where there is no other option, but to absorb the penalty and pay up.
Refinance
Although you may have gotten yourself into a fixed loan with fixed terms, these loans can be modified in different ways, and one popular method is to refinance.
According to Investopedia: A refinance or “Refi” for short, refers to the process of revising and replacing the existing terms of a loan or mortgage.
As a banker, I saw people looking for refinance options to gain some sort of financial benefit such as: saving money on their monthly payment, lowering their interest, or restructuring their term. Some way. some how, it always leads back to saving money.
Wire Transfer
Before working in the banking industry, I didn’t know what a wire transfer was. So, if you don’t know, don’t worry. It’s just something looking back, I feel it’s one of those financial terms everyone should know.
Bank of America defines a wire transfer as an electronic payment service for transferring funds by wire for example through SWIFT, the Federal Reserve Wire Network or the Clearing House Interbank payment system.
That sounds like a mouthful, so I’ll sum it up in a much simpler way. From my experience as a banker; A wire transfer is simply is sending (transferring) money from one financial institution to another (often times a large sum).
For example: if you want to purchase a property, the title company will want for you to wire the funds you are using for closing costs and down payment.
Due to the fact that you are doing a wire transfer, the key benefits are the speed in which the beneficiary receives the money and the amount that can be sent in one transaction.
Mortgage Cash-Out Refinance
This one applies more to home owners and future homeowners. I would recommend learning it just because looking backwards, I believe it is one of those financial terms everyone should know.
Rocket Mortgage defines a cash out refinance as taking out a larger loan on your property than you currently own and pocket the difference.
For example; If you owe $100,000 on your home, and you decide to do a cash out refinance of let’s say $50,000 (off of your available equity), your total loan amount will now become $150,000 and you pocketed the $50,000 in cash.
There are some considerations to take into account before making such a move. The Rocket Mortgage link above, goes into great detail of the pros and cons.
Home Equity Line Of Credit
If you are a home owner, you will want to get in on this if you haven’t already. Now, before I start, check out What is a HELOC? for a more extensive breakdown of HELOCs and how to get approved at a bank.
A home equity line of credit is a revolving line of credit that the bank offers to you, if you can qualify for it. This line of credit is based off of a loan to value percentage of 80-85% of your home equity. If you are not familiar with equity see my HELOC blog post. I also touch on it here, later.
This line of credit product can come in super handy for any type of repairs that you may need to do around the house, install a pool, remodeling and even purchasing another property.
From my experience as a banker, who has helped many different clients, I realized that a HELOC needs to be used correctly and with discipline if you are going to gain value from it.
A HELOC is an amazingly valuable product that most institutions offer if you can qualify. However, at the same time, it can become your worst nightmare if you are not wise with it.
Annual Percentage Rate/APR
Consumer Financial Protection Bureau defines Annual Percentage Rate (APR): as a broader measure of the cost to you of borrowing money since it not only reflects the interest rate but also reflects the fees you have to pay in order to get the loan.
The higher the APR, the more you will end up paying over the course of that loan.
Lingo and conversations can get tricky. So, you need to be aware of these financial terms, in order to properly defend yourself and make the correct decisions. These decisions benefit your personal financial needs and not someone else’s.
Annual Percentage Yield/APY
Prime example of how tricky this can get, is adding in Annual Percentage Yield into your financial vocabulary after just learning, Annual Percentage Rate.
See what I am saying? It can get confusing.
I have had clients who were intimidated to speak with me all because it was too much to learn and they felt they couldn’t keep up. It can be overwhelming, I get it.
All of these vocabulary terms take time to learn and master, so don’t feel overwhelmed.
Just know you should know them.
Bank Rate defines Annual Percentage Yield (APY) as the rate earned on an investment in a year, taking into account the effects of compound interest.
Knowing how APY works is important because it clearly shows an investor how much interest they will earn.
The next time you go to the bank to open a savings account, pay attention to the APY.
Interest Rate Percentage %
In helping so many people throughout my years in banking, you often run into people who are not aware of how the the banking and financial system works as a whole.
If you get caught sitting down with the wrong banker, you can find yourself in mud real quick. Here’s what I mean…
A bank, at the end of the day, is a business. They have employees to pay and money to make. Therefore, they have quotas they need to hit — like any other business.
Bankers and tellers will try to sell you on loans, credit cards and other great offers. No problem there. I did this for years.
The problem lies, if you don’t know how these things work and get sold on something you don’t need or weren’t explained to properly.
Interest Rates are one of those prime examples.
Anytime you are going to use money that is not yours, you are going to pay interest on that money. Only right, when you consider that you are able to purchase something with money that you don’t have just yet.
It’s important to always ask — “What is the interest percentage?”
Follow up question right after that is, —”Is the interest percentage fixed?”
Fixed Term Loan
So what is a fixed term loan?
For starters, a fixed term loan is usually the more popular option over a variable loan, just remember that.
A fixed term loan means that whatever interest rate you are approved for and gets added to your loan, does not go up or down fluctuating your monthly payments and possibly increasing to ridiculous heights.
Fixed term loans are primarily the better options because you will always know what you owe, and secure yourself from inflating interest rates.
Variable Interest Loans
These loans are the exact opposite of fixed loans. A variable loan has interest that varies from month to month. A variable loan can be a line of credit where interest is calculated by an index and this can cause it to rise and fluctuate over time.
If you can avoid a variable interest loan, then do so. But if you can’t, just make sure you get a full explanation of how it works from your financial advisor before you sign any documents.
FICO Credit Score
You will hear this term thrown around in the financial industry. Consequently, you want to know what it is and how to distinguish it from other credit bureau reports.
According to MyFICO, a FICO score is a three digit number that is calculated based off of data that is available on your credit reports. You can think of FICO as a summary of your credit reports.
It’s important to understand that not all credit scores are FICO scores. FICO scores are the industries leading standard when it comes to measuring a persons credit risk.
Not every application you use to view your credit, is a FICO calculated credit score. FICO is the real deal, and it can sometimes vary up to 100 points from everyday use applications like Credit Karma (at the time of writing this).
Debt Consolidation
The amount of clients that I assisted on a yearly basis, who struggled with some sort of financial debt was astronomical.
I ran lending applications (that was my job), the amount of debt is unreal.
Knowing how to manage your finances is vital to avoiding unnecessary debt.
That being said, if you struggle with debt yourself, there are some great options out there.
A debt consolidation is when you take multiple debts and bring them all into one monthly payment using a debt consolidation loan.
If you have multiple credit cards with high balances, often times a bank can offer you a personal loan in the amount of all of those balances and you can pay those balances off with the proceeds of the loan.
This eliminates the debt on all of those credit cards (presuming you don’t go charging them again) and leaves you with one monthly payment with a fixed lower (hopefully) interest rate.
Credit Card Cash Advance
Did you know you can go to an ATM with your credit card and pull out cash?
Well if you didn’t know, now you know. Now that you know that, you should never do this unless you are in one serious pinch.
If this is something so bad, why learn about it?
Because, sometimes in the financial industry, you will find people who have the knowledge, but choose not to share it. Or better yet, they share it, but only up to an extent.
Credit card companies would love for you to take advantage of this “incredible offer”, —of course, because they are the ones gaining off the astronomical interest rates.
Taking a cash advance from a credit card could end up costing you a lot of unnecessary stress and money. Take a look at your credit card disclosures and check out those interest rates and fees for cash advances. 😳
Sometimes in life, you need to know about the bad in order for you to properly defend yourself. Looking for just the benefits, is not enough. Sometimes you need to go further, looking for the negatives to really learn.
Annual Fees
Annual fees is a great financial term that everyone should know about (just to save you some money).
Too many times, I have clients signing up for things without even questioning the fees associated. If you want to open an account, there are ways to avoid the fees, but there are fees. And if you don’t stay alert, you can get eaten up pretty quick with fees.
Learn about your fees.
Look for fees in a lot of the financial products and vehicles you choose to use.
If you are on the lookout for them and asking about them, then you can avoid them. In order to do any of that, this simple term needs to become a part of your financial vocabulary.
Personal Loans
Personal loans are the bread and butter for every personal banker out there. These and HELOCs, are possibly two of the most products we deal with when helping clients on the lending side.
Why?
Unfortunately, most clients are usually in some sort of debt. They either have too many credit cards with balances, or they are paying one credit card each month with a significant balance and a high interest rate to go right along with it.
Very rarely, did I assist clients who wanted a personal loan in order to fund a large project or purchase (how it should be used).
A personal loan is a loan that is backed typically by three things: one, your credit score, two, your income and three, your debt to income percentage (DTI%).
If you have strong credit (no derogatory marks), proof of sufficient income, and your DTI is below 30-40%, you should be good to qualify for a personal loan.
Personal loans are a great option when:
- you need to purchase something large and do not have the liquidity to pay up front,
- the interest rate an institution is offering you is too high
- you have a headache paying 10 different credit cards each month and want to consolidate all the debt to one simple payment with possibly a lower interest rate.
This is a great financial vocabulary term that everyone should know about. The more you learn about it, the more you can see the value in using one in the future (if you need one).
I would prefer no debt at all, but for people who truly can take value from it, this can become a great option if used properly.
I helped a lot of my clients get out of debt with one of these.
Debt To Income/DTI
Let’s jump straight into DTI since I just introduced it within the personal loan section. Debt to income ratio (DTI) is a formula that lenders use to determine whether or not someone can repay the loan back.
DTI is pretty important to understand. I entered a-lot of loans where my clients had strong credit, great income, but failed the DTI portion.
You read that correctly.
You can have top tier credit, but if your income cannot support the amount of debt you carry, you will be denied any lending option at a local bank.
I went into DTI in much more detail on a previous blog post “13 Tips On How To Get Approved At A Bank.” The knowledge and experience in that post alone, is worth the read.
Secured Credit Cards
Let’s paint a picture:
You are in a point in your life where you would like to get your own personal credit card. You’ve never had a credit card before and where you stand currently, you feel it can be of value. You NEED one.
Now, either you go online, if you are computer savvy and apply for a credit card, or you set an appointment at your local bank to apply for one. 24 hrs later (can easily be longer) you receive a letter in the mail letting you know you were denied.
First question becomes, “why was I declined?”
And the second question becomes, “is there anything else I can do to get a credit card?”
The answer to the first question:
“Why was I declined?” has a lot to do with the fact, that because you have never had a credit card ever, you don’t have any credit established within the credit bureaus.
When you apply for a credit card, the lender will run your social security number and run an inquiry on your credit to see what your credit score looks like.
Only problem is, when they run your credit, it comes back as “insufficient credit history.”
Remember, banks and lenders lend money based off of risk tolerance alone.
If they have no history to go based off of, then that immediately makes you a high risk client to lend money to.
This is a prime example as to why establishing credit and maintaining healthy credit is vital for your financial future and financial health.
Answer to the second question:
“Is there anything else I can do to get a credit card?”
Yes!
Applying for a secured credit card should be your first go-to move.
The only problem is, many people don’t know about these options. These things are not taught to us. Which is my motivation in writing this. I believe we should all know these financial terms and use them in our vocabulary often enough, to the point where we master them.
A secured credit card is a credit card that is secured by your own money.
Because you don’t have sufficient credit history or established credit for that matter, the lender will require you to back your limit with your own secured deposit.
For example: The credit card company will approve you to start off and demonstrate your good faith with a 12 month $300 revolving credit limit. That $300.00 limit is backed with a secured deposit of $300.00 that the bank or lender holds, (just incase you decide to run off to Mexico with their $300.00 😂), they don’t lose.
At the banks that I have been employed for, they return your $300.00 back to you after the 12 months. If you have demonstrated good faith and have paid your monthly payments on time, they can “graduate” you with an unsecured credit card, and now you are on your way towards building your credit with no collateral needed!
Pro tip: Beware of secured credit cards that take your deposit upfront and never reimburse you back. Local banks typically hold your funds temporarily, but online institution applications can take that deposit and that becomes your price to establish credit.
Shop around.
Secured Loans
One of the major credit bureaus Experian, defines a secured loan as: a loan that is backed by collateral — financial assets that you own.
This can include cash, a home, and even in some cases, a vehicle as a form of payment in case you are unable to repay the loan back to your lender.
Collateral simply incentivizes the borrowers to pay back the loan on time.
Lines of Credit
Lines of credit are necessary to understand because they provide great value if you learn how to utilize them properly.
A line of credit, is basically a predetermined amount that a bank approves you for based off of your application. You can draw money from this line of credit whenever you may need to.
Lines of credit are revolving, which basically means you can use it, pay it back, use it, pay it back and so forth. A line of credit is essentially just like a credit card, just with a higher limit, lower interest rate, and easier access to cash.
Lines of credit are great to have on reserve in case of an emergency.
Lines of credit come with their own terms and expirations. You can be approved for a line of credit and have it for 3-5 years, after that you would need to re-apply in order to qualify for another term.
A great way to utilize lines of credits is to keep them at zero balance. If something presents itself whether that be an emergency or an investment opportunity, you have a quick and painless way to come up with cash money in a rather short period of time.
Money Market
If you ever worked in banking, then you know this one right here should give you at least a quarter-smile. 😏
In my years working as a banker, there were few times where I had to explain what a money market account is, and about 3 seconds into the explanation, I would get a shout like — “No! I don’t mess with the stock market!” I would then take a shot at trying to over come that objection, by saying something like, “It’s actually not tied to the stock market at all.” But, that never sat too well considering the product is called a “Money Market.” 🤷♂️
Just so you don’t have to go through any of this, let’s go over what a money market account actually is and how I learned what to use them for.
I love Bankrate, in fact I used them as one of my primary resources to help me increase my knowledge when I first became a banker, so l am going to use their definition.
Bankrate defines a Money Market account as an interest bearing savings product that is offered by most banks and credit unions. Pretty straightforward.
Problem is, because of their notorious name, Money Markets don’t get much attention. Instead most people have their savings account in a low interest bearing account. And when I mean low interest, I mean a whopping 0.01% 🤦♂️
Instead, get familiar with a money market account and use that account to hold 3-6 months of monthly expenses incase of an emergency.
You will have a safe place to store your money while it gains a little bit of interest and if an emergency ever arises (knock on wood) you have money to fall back on and can stay away from debt.
Time Deposit/CD
Time Deposits (CD’s) are a great storage place for money that is just going to be sitting in your bank that you would say, is just extra money.
When I say extra money, I mean it is not emergency funds and not investment funds. The money is just sitting there.
You may not be at that point yet in your own financial journey, and that’s ok, with time you will be. 😉
If you are there already, then you will see the possible value in a time deposit (CD).
A time deposit or certificate of deposit (CD) is a product offered by banks and credit unions that provide an interest rate premium in exchange for the customer agreeing to leave a Lum sum deposit for a specified pre-determined time.
CD’s can be a great savings option, just make sure you do research on which bank offers the best rate and least penalty withdrawals.
Credit Card Utilization Percentage
Credit Card utilization is one of the biggest factors that come into play when you see those hard swings within your credit score.
One day your score can be at 800 and if you charge up a credit card or two above 30%, you can see that score drop to a low 700 rather quickly.
This fluctuation in your score, is caused by utilizing too much credit on your credit limit.
The higher that percentage increases, the lower your credit score goes. Only way to improve that score, is to pay down the debt and bring the credit utilization percentage down.
Maintenance Fees
You may already know exactly what a maintenance fee is, if you don’t, I will break it down here in just a second.
I want to stress this one, because everyone may know what it means, but yet, people are throwing their money way paying unnecessary maintenance fees.
In banking a maintenance fee is a charge that is made to the customer by the bank for not meeting specific requirements.
This is a big one, because I helped a high number of clients who were paying fees on a monthly basis not knowing. They could have avoided all that money lost, if they just kept maintenance fees top of mind more often.
If you are going to open a checking account, savings account, credit card, equity line of credit, a brokerage account, anything really, —always ask about fees.
Revolving Debt
Debt is a killer!
I repeat, stay as far away from debt as you possibly can.
If you are going to get into debt, make sure you are purchasing non- depreciating assets.
Too many of my clients are in serious debt all because they decided to purchase a depreciating asset, like a new car.
Learning as much as you can about this financial term is important towards ultimately achieving wealth.
The reason I know this, is because aside from all the books you find that back this up, I have had my fair share of interactions with self-made millionaires working in the banking industry—they all say the same thing…
Stay away from debt!
Credit Karma defines revolving debt as the balance you carry from any revolving credit.
A perfect example of revolving debt that we touched on earlier in this article, is credit cards.
Credit cards allow for you to purchase something using credit and pay it off within a given structured payment plan. That balance that is being carried over month-to-month as you work to pay it down, is known as revolving debt.
This is the exact type of debt that you NEVER want. Which makes it a great financial term that everyone should be familiar with in their financial vocabulary.
Final Thoughts
At the end of the day, these are all financial terms that everyone should know and have a good grasp over.
Too many people are managing their finances without a clear understanding of the basics.
I learned working as a banker, that the best place to start learning is with the basic financial vocabulary terms.
Once you learn the financial terms, you can then move forward to really breaking down the key details of banking and finances.
This is critical to learn, because you can then have better control over your money and who you trust with it.
I hope that my experience and knowledge that I picked up working in the banking industry can really help and add value to anyone reading this. 🙏
