Banking 101: Understanding common banking terms and definitions
This clear, concise banking glossary can help you understand the most important banking terms, so you can more confidently communicate with your bank.
Common banking terms and definitions
This guide breaks down common banking ideas so you can navigate your financial journey more easily. You can also refer to Banking Basics in our Education section for more insights and tips.
Account balance: The portion of your account balance that’s available for withdrawal or use, except for pending deposits or holds
Amortization: The process of spreading out loan payments over time. These are usually monthly payments that reduce both the interest and the principal.
Annual percentage rate (APR): The cost of credit expressed as a yearly interest rate charged on loans or credit cards, including fees and additional costs. For example, if you put $1,000 on a credit card with a 20% APR and no fees, you’ll owe $200 in interest over one year if you don’t pay down the balance.
Annual percentage yield (APY): The total amount your investment earns in a year, taking into account compound interest.
Available balance: The amount of money currently available in your bank account, including deposits, withdrawals and pending transactions.
Automated Clearing House (ACH): An electronic network for processing transactions, such as direct deposits and bill payments. When your paycheck is deposited directly into your account, it’s processed through the ACH system. ACH transfers are typically faster and cheaper than wire transfers.
Cashier’s check: A check issued and backed by a bank, guaranteeing payment.
Certificate of deposit (CD): A savings account in which money is deposited for a fixed term at a fixed interest rate. Early withdrawals may result in penalties. For example, you may deposit $5,000 into a 12-month CD with a 3.00% APY. At the end of the term, you earn $150 in interest. The CFPB’s website has more information on CDs.
Collateral: Assets pledged to secure a loan. If the borrower defaults (misses a loan payment), the lender can claim the collateral to recover the loan amount.
Compound interest: Interest calculated on both the principal amount and any previously earned interest. For example, if you invest $1,000 at 5.00% APY, you earn $50 after the first year. In the second year, you earn 5.00% APY on that $1,050, or $52.50. Investopedia’s article, The Power of Compound Interest, has more calculators and examples.
Credit card: An open credit account accessible with a payment card that allows you to borrow funds up to a credit limit for purchases or cash advances, subject to repayment with interest. If you use a credit card to buy a $500 item, you’ll owe interest on any unpaid balance after the grace period. Paying off your credit card balance in full each month avoids interest charges.
Credit score: A number that reflects your creditworthiness, based on your credit history and financial behavior. Credit scores may affect whether you can qualify for loans, pass tenant screenings and qualify for other financial services. Read this article for more information on credit reports and credit scores.
Debit card: A payment card linked to your checking account that you can use to make purchases or withdraw cash.
Direct deposit: An electronic transfer of funds into your bank account, typically used for payroll or government payments. To learn how to set up your direct deposit, read our article, How to Set Up Direct Deposit with Your Employer.
Electronic funds transfer (EFT): A digital transfer of money between accounts, such as ACH payments, wire transfers or online bill pay. For example, paying your electricity bill online via your bank’s website is an EFT.
Escrow account: An account that holds funds for specific purposes, such as property taxes or homeowner’s insurance for a mortgage.
FDIC (Federal Deposit Insurance Corporation): A U.S. government agency that insures deposits in banks, protecting account holders up to $250,000 per account. Visit FDIC.gov for more information.
Fixed interest rate: An interest rate that remains the same throughout the term of a loan or account.
Grace period: In a CD, a period after the maturity date in which the account owner can withdraw funds without penalty. For loans, it’s a set period after the payment’s due date during which a borrower can still make a payment without incurring late fees or penalties.
Home equity line of credit (HELOC): A line of credit secured by the equity in a home. For example, if your home is worth $300,000 and you owe $200,000, you may qualify for a $50,000 HELOC. Our HELOC calculator lets you easily estimate monthly payments for your situation.
Interest-only loan: A loan in which you only make the interest payments for an initial period and pay the principal later.
Interest rate: The percentage charged on a loan or earned on a savings account over time. For example, if you borrow $1,000 at a 5% annual interest rate for three years, the total interest you'll pay is $150 ($50 a year).
Joint account: A bank account shared by two or more individuals, typically spouses or business partners.
Loan principal: The original amount borrowed from the lender, excluding interest. When you make a loan payment, part of that goes toward paying down the principal, and another portion goes toward the interest. The outstanding principal is the remaining amount you still owe after making payments. For example, if you take out a $10,000 loan and pay down $3,000, the loan principal is now $7,000.
Minimum balance: The minimum amount required to keep your account active and avoid incurring fees. Fees may sometimes also be avoided by meeting a specified balance requirement. Be sure to review the requirements before opening an account.
Mobile banking: A service that allows you to manage your accounts and perform transactions through a mobile app.
NSF (non-sufficient funds): A status indicating that a check or transaction could not be processed because there aren’t enough funds in the account.
Overdraft: A situation in which you withdraw more money than is available in your account, which may result in an overdraft fee.
Overdraft protection: A service that transfers funds from a linked account to cover an overdraft, reducing fees and penalties. For example, if you overdraw your checking account by $50, overdraft protection can pull $50 from your linked savings account to cover it.
Prepayment penalty: A fee charged by a lender for paying off a loan early, typically applied to mortgages or term loans.
Prime rate: The interest rate that commercial banks charge their most creditworthy customers, which often serves as a benchmark for loans.
Reconciliation: The process of comparing your account balance with bank records to ensure accuracy.
Routing number: A nine-digit number used to identify your bank in electronic transactions.
Savings account: An account in which you deposit money and can earn interest over time.
Secured loan: A loan backed by collateral, which is an asset the borrower owns, such as a house, a car, or a savings account. This collateral serves as security for the lender—meaning they can take it if the borrower defaults on the loan.
Service charge (or maintenance fee): A fee charged by the bank for account maintenance or specific transactions.
Statement balance: On a deposit account, the total amount of money in the account at the end of a statement period. For loans or credit cards, it’s the total amount you owe at the end of billing cycle, as detailed on your monthly bank or loan statement. Statements provide a snapshot of your balance at a particular point in time, including interest, fees and, if applicable, transactions up to that date.
Stop payment: A request to a bank to cancel a check before it’s processed.
Term loan: Financing with fixed or variable interest rates, which gives borrowers a lump sum of cash up front that they can repay over a set period. Term Loans are commonly used for business or large purchases.
Variable interest rate: Also called an adjustable or floating rate, a variable rate changes over time. Variable interest rates are typically based on a benchmark or index rate. Unlike fixed interest rates which remain constant over the term of the loan, variable rates can go up or down—so your loan payments may change as market interest rates shift.
Wire transfer: An electronic transfer of funds between banks, often used for large or international transactions. This article from the Federal Trade Commission, What to Know Before You Wire Money offers best practices on keeping your assets secure.
Wire transfer fee: A charge for sending or receiving funds through a wire transfer.
Knowing banking terms makes you a better customer
By understanding these banking terms, you can communicate more effectively with financial institutions; make better decisions about loans, savings, and credit; avoid fees and penalties due to misunderstandings and ultimately navigate your personal and business banking with greater confidence and clarity.
Whether you’re new to banking or just want to refresh your knowledge, take the time to review this guide. Don’t hesitate to reach out to your local Associated Bank for further clarification on any of these terms; we also understand that when our customers have a solid grasp of banking terminology, they’re better equipped to manage their money effectively.
