10 banking terms you need to know

Here are 10 banking terms everyone should know:

  1. Compound interest
    When you’re investing or saving, compound interest is the interest you earn on your initial deposit, plus any interest you’ve accumulated over time. Compounding is an important concept to understand because it can play a key role in achieving long-term financial goals, like saving for retirement.
  1. Annual percentage rate
    APR is the cost-per-year of a debt such as a loan, including the nominal interest rate and any related fees, expressed as a percentage of the principal owed. This is an important figure because it represents the actual annual cost of borrowing money.
  1. Escrow
    This term has a few meanings, but in real estate it is when an impartial third party holds on to something of value during a transaction. For example, depending upon your type of mortgage loan, credit history, etc. an escrow account may be required when you purchase a home. In this case, funds are held with your lender to make payments to your homeowners insurance and property taxes.
  1. Co-signer
    This refers to someone who agrees to take responsibility for another person’s debt in the event payments aren’t made. Co-signers are sometimes used to help borrowers with poor credit history receive a lower loan rate; lenders may also require a co-signer for these individuals Parents sometimes co-sign on a child’s car or student loan. Such debts are reflected on both co-signers’ credit reports and any future issues will affect each borrower’s credit score.
  1. ARM (Adjustable-rate mortgage)
    This is a mortgage in which the interest you pay on your outstanding balance rises and falls based on a specific benchmark. ARMs, like those from Mortgage Lending Services, usually start out at a fixed-rate for a short period of time, and then the rate resets annually based on the benchmark. For example, if you choose a 5/1 ARM mortgage, your rate is locked-in for the first five years and then adjusts each year after according to the terms of the loan.
  1. Annual percentage yield
    APY reflects the total amount of interest paid on savings or investment accounts, based on the interest rate and frequency of compounding. The quoted APY tells you how much you’re really making on your money.
  1. Overdraft
    This happens when more money than the available balance is withdrawn from a bank account, often resulting in an overdraft fee as the financial institution covers the difference. These charges can be avoided by keeping extra money in the account as a buffer or by enrolling in overdraft protection.
  1. Collateral
    This is typically an asset used to secure a loan. If you fail to make payments on the debt, the lender may be able to seize the property used as collateral, such as a residence financed with a mortgage or a car purchased with an auto loan.
  1. FICO credit score
    Financial institutions, like TruStone Financial, use this number to measure a borrower’s credit worthiness. FICO is an acronym for the company that created the procedure for calculating a credit score based on payment history, length of credit history, lines of credit and total amount owed.
  1. Net worth
    This is the difference between your assets and liabilities. Calculate your net worth by adding up the money or investments you have, including value of your home and car, as well as the balances in any checking, savings, retirement or other investment accounts. Then subtract your debt, such as your mortgage loan, credit card balances and any other obligations. The resulting net worth number helps you assess your overall financial health.

 

Editor’s note: Segments of this article were taken from NerdWallet.com and HuffingtonPost.com.