Knowing and understanding banking terms helps improve your financial literacy, which in turn, improves your financial strength and helps you pave your way to financial freedom.

Below are twelve banking terms you need to know about:

1. Interest

Interest is a proportion of a sum of money that is gradually added to your savings or investment. There is a significant probability that you will have to pay interest when you borrow money from a lender.

You might think of it as a way to express your gratitude to the lender for extending you the loan and allowing you to pay it back in instalments.

2. Compound interest

Interest that is applied to both the initial investment and any further interest. For instance, if you deposit $100 into an account that accrues compound interest at 5% annually, you will get 5% on $105 next year. On a $100 investment, non-compounding interest would still yield 5%.

3. Money laundering

It is an illicit financial procedure where crooks hide the source of the funds. Usually, it’s done to hide the illicitly earned black money.

Criminals employ the practice of money laundering to cover up the illicit source of their revenue. Money is “cleaned” of its illegal origin and made to seem like legitimate business earnings by moving via intricate transfers and transactions, or through a network of firms.

4. Balance Transfer

For those who use many credit cards, this is a method of payment. Balance transfers, as the name implies, involve moving a credit card’s balance from one to another. This is helpful if the second credit card has a lower interest rate or if the cardholder is unable to pay the whole balance on the first one.

5. Direct deposit

A direct deposit is an electronic money transfer between two accounts. A worker may, for instance, set up direct deposit to have each paycheck delivered right to their checking account. If the account user gets a certain amount in direct deposits each month, certain banks will eliminate fees on checking accounts.

6. Collateral

In the event of large loans, the borrower must give the bank some sort of security (except in home loans where the property is the security). Collateral is the name given to such security. The bank has the right to attach the loan’s collateral and recoup its losses if the borrower defaults on the loan.

7. Savings Account

An account with a higher interest rate promotes saving. The number of withdrawals per month from many savings accounts is limited.

8. Annual percentage yield

Annual percentage yield is abbreviated as APY. Throughout essence, based on the interest rate and frequency it is compounded in a year, the percentage rate determines the total amount of interest you will receive. Compounding is sometimes referred to as “interest on interest.

9. Credit history, credit score, and credit.

Credit is the capacity to borrow money, or the readiness of banks and other lenders to provide you with a loan. A solid credit history indicates that you have a history of making on-time payments on your obligations and expenses.

A measure of your creditworthiness based in part on your credit history is your credit score. A higher credit score can make you more likely to get approved for loans with lower interest rates, better terms, greater loan amounts, and higher credit limits.

10. Student Loan

Borrowers utilize student loans to cover the cost of their educational expenses. Once the borrower completes their studies and begins working, they are expected to repay their student loans. Several lenders provide loans for students with cheaper interest rates.

11. An overdraft

If you ever run out of money in your current account, an overdraft acts as a buffer, providing you with some more cash.

Your bank could impose a fee, interest, or both as punishment for using your overdraft. Therefore, it’s critical that you manage your money well and avoid going beyond your overdraft limit.

12. Networth

The difference between your assets (what you possess) and obligations is simply your net worth (what you owe).

You may figure out yours by adding up all of your assets, including the worth of your home and automobile in today’s market, as well as the balances in all of your checking, savings, retirement, and other investment accounts.

Subtract all of your debt, such as the sum on your credit cards, any outstanding loans, and your mortgage. The resulting net worth figure allows you to gauge your general financial well-being.