Banking Terms 101: A Beginner's Guide

Banking can seem overwhelming, especially if you're new to managing your finances. Understanding the basics of banking terms is essential to making informed decisions about your money.

A bank account is a type of savings account that allows you to deposit and withdraw money as needed. It's like having a digital piggy bank where you can store your cash.

When you open a bank account, you'll often be asked to provide identification and proof of address. This is to ensure that you're who you say you are and to prevent identity theft.

Your bank account will have a unique account number and routing number, which you'll need to make transactions. Think of it like a special address for your money.

A deposit is when you add money to your bank account, whereas a withdrawal is when you take money out.

To start, it's essential to understand what a bank account is, and that's exactly what you get when you open a checking or savings account. This is where your money lives, and you can access it easily.

A bank statement is a record of all the transactions made on your account, including deposits, withdrawals, and transfers. You should review your statement regularly to ensure everything is accurate.

Understanding these fundamental concepts will help you navigate the world of banking with confidence.

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To start, it's essential to know what a bank account is. A bank account is a place where you can store your money safely. You can deposit money, withdraw money, and even write checks to pay for things.

Having a bank account helps you keep track of your money. It's like a digital wallet that you can access anywhere, anytime. You can check your balance, transfer funds, and even pay bills online.

Banking terms are important to know, and there are 19 of them to get familiar with. Recommended: How to Balance Your Bank Account.

Checking accounts are a common type of bank account that enable consumers to access and spend their money easily.

You can tap funds in your checking account by writing paper checks, using an ATM, swiping or tapping a debit card, entering account information online, or using mobile payment apps.

Most people use checking accounts to receive their wages and pay their bills.

Many checking accounts don’t earn interest, but you may find some that offer a low interest rate, often at online banks.

Checking accounts may come with a variety of fees, so it can be wise to compare charges for at least a few accounts before opening one.

A routing number is a nine-digit number that identifies your financial institution, and it's essential to keep it confidential to avoid bank fraud.

Larger banks may have multiple routing numbers based on the geographic location where the account was opened.

A routing number, also known as an American Bankers Association number or ABA number, is unique to your bank and helps other entities route payments to and from your bank.

Most banks have a single routing number, but larger banks may have multiple routing numbers attributed to specific regions.

Remember, a routing number is always nine digits and is crucial for secure banking transactions.

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An ACH transfer is a type of electronic fund transfer that's regulated by the Automated Clearing House, governed by the National Automated Clearing House Association, or NACHA.

ACH transfers are electronic movements of money from one bank account to another. They're a convenient way to transfer funds, and you can even schedule them in advance.

A routing number is required for an ACH transfer, and it's unique to your bank. This helps ensure that the transfer reaches the correct bank account.

Most banks have a single routing number, although larger banks may have multiple routing numbers attributed to specific regions.

When it comes to managing your finances, having the right loan and savings options can make all the difference. Savings accounts are a great place to start, and they're typically used to hold money for short- or long-term goals or emergencies.

You can add to your savings account at any time, but certain types of withdrawals may be limited to six per month. Online banks tend to have higher interest rates than national banks, so it's worth shopping around to find the best deal.

If you're looking to earn the highest rates, consider checking out high-yield online savings accounts.

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CDARS is a service that provides a solution for large depositors looking for additional FDIC coverage for certificate of deposit account balances that exceed the FDIC coverage limit.

With CDARS, large depositors can maintain multi-million-dollar FDIC-insured CD balances through a single financial institution. This means you can keep your money safe and earn a higher interest rate than standard savings accounts.

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CDARS is particularly useful for those who have a lot of money to save and want to make sure it's protected. It's like having a safety net for your savings.

Certificate of deposit accounts, like those offered through CDARS, typically pay higher interest rates than standard savings accounts. This is because you're agreeing to keep your money locked in the account for a set period of time.

In exchange for the higher interest rate, you may be required to keep your money in the CD for a certain amount of time, which can range from a few months to several years. This means you won't be able to access your funds as easily as you would with a standard savings account.

It depends on your financial situation whether to save or pay down debt. If you have high-interest debt, such as credit card balances, paying it off quickly can save you money in interest charges.

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Consider this: paying extra on high-interest debt can be like earning a higher interest rate on your savings. For example, if you have a credit card with a 20% interest rate, paying off the balance could be a smart move.

However, if you have low-interest debt, such as a mortgage, it might make more sense to prioritize building an emergency fund. This way, you'll have a cushion to fall back on in case of unexpected expenses or job loss.

In general, it's a good idea to have some savings set aside for emergencies, but how much you need depends on your individual circumstances.

When choosing a loan, it's essential to consider the type of loan that best suits your needs. This will help you make an informed decision and avoid potential pitfalls.

A personal loan can be used for a variety of purposes, such as paying off high-interest debt or financing a major purchase, like a car or home improvement project.

You can choose from a fixed-rate loan with a fixed interest rate or a variable-rate loan with an interest rate that may change over time.

A home equity loan, on the other hand, allows you to borrow money using the equity in your home as collateral, often with a lower interest rate than other types of loans.

A home equity line of credit (HELOC) works similarly, but provides access to a revolving line of credit that can be drawn upon as needed.

Credit cards often offer cash advances and other features that can be useful in a pinch, but be aware that they usually come with high interest rates and fees.

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Saving money can be a great way to build a safety net, but it's not always clear how to do it effectively. A savings account is a type of bank account that lets you safely store your money, and it earns interest over time.

You can stash funds in a savings account for short-term goals, like next year's vacation, or for emergencies, such as if you're laid off or need unexpected car repair. Most experts advise saving enough cash to cover three to six months' worth of basic living expenses.

A high-yield savings account can pay out more interest than a typical savings account, sometimes up to 9x the national savings account interest rate. Online banks tend to have higher interest rates than national banks.

You can access funds in a savings account as needed, although some financial institutions may limit how often you can take money out. It's a good idea to check the terms of your savings account before opening it.

Electronic fund transfers are a convenient way to move money around, and they're often quick and secure. Examples of EFTs include wiring money, paying with a debit or credit card, sending funds via P2P transfer, receiving direct deposit, and conducting ACH transfers.

These types of transactions are typically electronic, which means they happen digitally. This is in contrast to cash or paper checks, which are physical.

Electronic fund transfers can be used for a variety of purposes, including paying bills, sending money to friends or family, and making purchases online.

Overdraft fees can be a significant charge, with the average fee currently over $27 if your bank covers the shortfall on a transaction.

You can link accounts to provide coverage in case of overdraft, which might help avoid these fees.

Annual percentage rate, or APR, represents the total cost of borrowing money, including interest and fees.

The APR, or Annual Percentage Rate, is a crucial number to understand when borrowing money. It represents the total cost of borrowing, including both the interest rate and fees.

APR is not just the interest rate, it also includes fees. This means that if you're comparing loans, you need to look at the APR to get a true picture of the total cost.

APR can affect your mortgage, making it more expensive than you initially thought.

APR is a key factor to consider when taking out a loan, as it can significantly impact your financial situation.

APY is a crucial concept to understand when it comes to saving money. It's the amount of interest you gain from keeping money in an account in a year, including compound interest.

APY is different from the straight interest rate, which only accounts for the interest earned on the original deposit. APY, on the other hand, earns interest on the interest you've earned thus far, making it a more accurate measure of your savings growth.

For example, if you put $100 in an account that earns compound interest at 5% a year, in the next year you will earn 5% on $105, not just $100. This is why securing a high APY is important for your savings.

You can compare top APYs to see which accounts offer the best rates. For instance, the Axos ONE Savings account offers an APY of 4.86%, while the Varo Savings Account offers 5.00%.

An overdraft fee is incurred when your checking account doesn't have enough funds to cover a payment that's requested.

The financial institution may pay what your account lacks, leaving your account with a negative balance. This can happen when you pay for a transaction with a check or debit card, but don't have enough money in your account to cover the purchase.

The average overdraft fee is currently quite high, over $27. You may be able to link accounts to provide coverage in the case of overdraft, which could help avoid these fees.

A basis point is one-hundredth of a percent, making it a useful unit of measurement in finance.

If you're dealing with interest rates or fees, you'll often see them expressed in basis points. For example, 100 basis points is equivalent to 1%.

Understanding basis points is crucial when comparing different loan offers or investment options, as it helps you make informed decisions about your finances.

Account management is a crucial aspect of banking. A joint bank account allows more than one person to manage the account.

With a joint account, any account holder can withdraw or deposit money at their discretion. This can be beneficial for couples or family members who want to merge their finances.

A debit card is a form of payment that typically comes with a checking account.

You can use a debit card to pay for goods and services with money from your checking account by swiping, tapping, or waving it at a point of sale.

You can also enter your debit card to pay bills online.

Tying your debit card to peer-to-peer transfer apps allows you to send money between friends.

Joint accounts can be a good tool for couples or family members who want to merge their finances.

A joint bank account allows more than one person to manage the account.

This means any account holder can withdraw or deposit money at their discretion.

Having a minimum balance in your bank account can be a bit of a mystery, but it's actually pretty straightforward. Not all bank accounts require a minimum balance, but if they do, it can vary from one financial institution to the next.

The minimum balance requirement can differ by account type, so you'll need to check your account terms to see what's expected of you. Some accounts may have a higher minimum balance requirement than others.

If you don't meet the minimum balance requirement, you may be charged a service fee, which can add up over time. These fees can range from a few dollars to tens of dollars, depending on the bank and the account type.

Your bank account number is a unique string of numbers, usually between eight and 12 digits, that identifies your individual bank account.

You can find it on your account statements, on paper checks, and on your bank's website and in its app when you're logged in.

Every time you open a new bank account, you'll get a new account number.

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Congress created the Federal Deposit Insurance Corporation (FDIC) in 1933 to create a safety net in the event of a bank failure.

The FDIC offers insurance typically up to $250,000 per depositor, per account category, per insured institution. Some banks have programs to offer even a higher level of insurance than that. Deposits at credit unions are also typically insured in a similar manner, but by the National Credit Union Association, or NCUA, vs. FDIC insurance.

The FDIC is a crucial part of the US banking system, created in 1933 to provide a safety net in the event of a bank failure.

Congress created the FDIC to instill confidence in the US banking system. It offers insurance typically up to $250,000 per depositor, per account category, per insured institution.

Some banks have programs to offer even a higher level of insurance than that. Most but not all banks are FDIC-insured, so it's worth checking that your funds are at an institution that is.

Deposits at credit unions are also typically insured, but by the National Credit Union Association, or NCUA, instead of FDIC insurance.

ChexSystems is a consumer reporting agency that collects information about closed consumer checking and savings accounts.

A financial institution may review your ChexSystems report to assess your risk when you apply to open a new bank account.

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Having a solid emergency fund in place can be a lifesaver in unexpected situations. You'll want to aim to save three to six months' worth of basic living expenses in a readily accessible savings account.

This amount can help you avoid taking out a personal loan or going into credit card debt when unplanned expenses arise, such as a layoff, car repair, or high vet bill.

A bank run occurs when depositors try to withdraw all of their money from a bank because they fear the institution will fail.

This can happen quickly, often within hours or even minutes, as news of the bank's potential failure spreads.

A bank run can lead to a liquidity crisis, where the bank doesn't have enough cash on hand to meet the sudden surge in withdrawals.

This can cause a bank's assets to be liquidated, potentially resulting in losses for the bank and its depositors.

In extreme cases, a bank run can even lead to the bank's collapse, leaving depositors without access to their money.

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Having an emergency fund in place can be a lifesaver in unexpected situations. This fund is typically saved in a separate savings account that you can tap into when you need it.

You should aim to save enough cash to cover three to six months' worth of basic living expenses. This amount can help you avoid taking out a personal loan or going into credit card debt when unplanned expenses arise.

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