Financial terminology can be complex, so we’ve provided definitions of many common financial terms to help with your personal financial planning. If you have questions or need more information, please call us at 410-750-0020.
Acceleration clause: A legal term referring to a contract that states that an unpaid balance can become due immediately if a specific circumstance, such as missing a payment, occurs.
Account balance: The amount of money in an account at a specific point in time.
Account statement: A statement of transactions over a specific period of time. The statement usually includes the balance on an account at the end of the statement period.
Active account: An account, such as a checking or credit account, that is used regularly or has frequent activity.
Adverse action: A creditor’s decision to refuse a person’s application for credit or cancel a line of credit.
Amortization: The process of reducing debt through regular installment payments, resulting in the payoff of a loan at its maturity (when the loan term is complete).
Annual percentage rate (APR): A measure of the cost of credit expressed as a yearly rate.
Annual percentage yield (APY): A percentage reflecting the total amount of interest earned on a deposit account. APY is based on the interest rate and the frequency of compounding (how often interest is added to the account principal) over 1 year.
Annual report: A company’s financial statement that is issued on a yearly basis.
Appraisal: The monetary value of an item determined by an appraiser, who is a professional with knowledge and expertise about particular items.
Appraisal fee: A fee paid for an estimation of value (appraisal) given by an appraiser.
Appreciation: The increase in the value of an asset due to various reasons, such as changes in inflation or interest rates.
Asset: Anything owned by a person or a business that has commercial or exchange value.
Audit: An investigation to verify that all assets, liabilities, income and expenses are correctly stated.
Automated teller machine (ATM): A machine that processes a variety of self-service banking transactions using a credit or debit card with a personal identification number (PIN).
Automatic clearing house (ACH): An ACH is a computerized facility that financial institutions use to electronically settle payments and deposit transactions.
Automatic funds transfer: The electronic transfer of funds from one account to another, set up to happen on a regular basis.
Average daily balance: A method of calculating credit card interest using the sum of each day’s balance on a credit card, divided by the number of days in the billing cycle.
Balloon payment: A final payment that is typically much larger than regular payments and includes any outstanding principal and interest remaining on the loan. Balloon payments are common with loans that have an adjustable rate or an interest-only period.
Banking center: The physical location of a bank where customers can go to engage in a variety of banking services.
Bankrupt: A person or institution that no longer has the funds to cover debts and has to seek financial assistance.
Basis points: A unit of measurement for interest rates or yields, equal to 1/100 of a percent (0.01%).
Bearer: A person who holds or presents for payment a negotiable instrument, such as a check or bank draft. The instrument states that it is payable to “bearer” or “cash,” which means that whoever holds the instrument can cash it (receive the funds due on it).
Beneficiary: A person who should receive the balance in an account upon the death of the account holder.
Bill pay: Routine payments made electronically from a banking account to a specific vendor. Banks provide this service as part of broader online banking services.
Bond: A certificate of debt by which an investor loans money to an entity (usually a government or corporation). The borrower (also known as the issuer) must pay interest and pay back the principal amount at a set time.
Bounced check: A check that cannot be processed because the account holder has insufficient funds to cover the amount written on the check.
Broker: An independent agent or member of a firm who brings buyers and sellers together.
Business day cutoff: The latest time during a specific business day that a transaction can be made and posted to an account.
Bylaws: A rule or law that governs the internal affairs of an organization.
Canceled check: A check that a bank has already paid and charged to the account holder’s account. Once a check is canceled, it is no longer valid.
Cash advance: Cash taken out (withdrawn) from a line of credit or credit card. Cash advances often carry a higher interest charge than regular purchases.
Cash item: An item that is accepted for immediate credit to an account or that can be exchanged for cash.
Cashier’s check: A form of check that assures that funds are available. The bank writes a cashier’s check after the customer provides cash or the bank takes a verified account withdrawal for the full amount.
Certificate of deposit (CD): An interest-bearing certificate issued by a bank in exchange for funds provided to the bank by the holder of that certificate.
Certified check: A personal check that is certified or guaranteed to be good.
CD laddering: A practice in which an investor divides invested money into equal amounts of CDs with different maturity dates.
Charge off: When a lender no longer expects payment to be made to an account and writes off the balance as a bad debt.
Check: A written, dated and signed instrument that contains an unconditional order from the drawer (the person or business that writes the check) that directs a bank to pay a specific amount of money to a payee (the person or business the check is written to).
Checking account: An account that people or businesses can use to withdraw and deposit funds by check or electronic transfer.
Check clearing: A check’s movement from a depository institution (the bank where it was deposited) to the bank on which it was drawn (the account holder’s bank).
Check hold: Waiting period of 1 to several days. Financial institutions use a check hold to make sure the drawee bank (the check writer’s bank) will pay deposited checks. After a check “clears,” the bank can lift the check hold.
Check truncation: The conversion of physical checks into electronic form for transmission to the paying bank.
Closed-end credit: A credit agreement that specifies when the full amount of a loan plus finance charges (interest and bank charges) are due to be repaid.
Closing costs: The costs incurred by sellers and buyers in the transfer of real estate ownership.
Collateral: Assets that are promised to an institution as backup to secure a loan or form of credit being given.
Collateralized loan: A loan that is secured by collateral.
Collected funds: Cash deposits or checks that have been presented for payment and for which payment has been received.
Commercial loan: A loan given to a business, either all at once or in a series of payments.
Compound interest: Interest from a previous period that is added to the principal balance. Future interest will be calculated and applied to the full new balance.
Consolidation loan: Loan that combines several debts into 1 loan to reduce the dollar amount of payments owed each month.
Correspondent bank: A financial institution that maintains a relationship with another financial institution or provides it with services.
Co-signer: A person who signs for another person and is considered responsible for the loan if the primary signer fails to fulfill his or her obligation.
Credit card authorization: Verification by a credit card issuer that approves a credit card purchase based on the card holder’s line of credit.
Credit bureau: An organization that gathers and maintains information about individuals’ credit.
Credit card: A personal credit card or business credit card issued by a financial institution, giving the account holder the ability to borrow funds against the account named on that card.
Credit disability insurance: Insurance that makes payments on a loan(s) if the owner of the loan becomes unable to work because of a disability.
Credit limit: The maximum dollar amount available on a line of credit.
Credit rating: A rating that is based on how creditworthy a company or person is considered to be.
Credit report: A report that is given and based upon a person’s credit history.
Credit scoring system: A system used to determine whether an institution will grant credit to a person or business. Credit scoring uses payment history, total amount of debt and total income to establish a credit score.
Credit union: An organization that provides financial, insurance and other services for members of that specific group.
Data processing: The processing of information, either electronically or manually.
Debit: Money taken from an account or money owed to a lender.
Debit card: A card that allows electronic access to a bank or credit account to initiate withdrawals from a person’s funds.
Declining balance: The decreasing amount owed on a debt as more payments are made.
Deed: A written agreement that allows the title of a property, or an asset of some form, to be transferred from one person to another.
Deed of trust: A type of secured real estate transaction that some states use instead of mortgages. A deed of trust involves three parties: a lender, a borrower and a trustee:
- The lender gives the borrower money.
- The borrower gives the lender one or more promissory notes (written agreement that the borrower will pay back the money in regular installments and/or by a certain date).
- The trustee sells the property at public auction only if the lender defaults on (does not make) the loan payments.
Demand deposit: Funds held in a deposit account (such as a checking, savings or money market account) that the account holder withdraws on demand.
Direct deposit: A method of transferring a payment, such as a salary, electronically from a payer’s bank account into the payee’s bank account.
Disclosure statement: A statement that outlines specific terms and conditions of a loan.
Dividend: Interest earned on any asset account (such as savings, a certificate of deposit (CD) or an investment) paid by the financial institution to the account holder.
Dormant account: An account that shows no activity over a certain (usually extended) time period. See also inactive account.
Draft: A check for which payment is guaranteed to be available by the issuing bank.
Electronic funds transfer (EFT): The transfer of funds electronically between accounts.
Emergency cash: An account used specifically to set aside money for use in an emergency situation.
Endorsement: A person’s signature on a document, sometimes known as signing over a document or check. The signature gives that person’s rights to another person or group named in the endorsement.
Enhanced login security: Enhanced technology that protects an account from being easily accessed by someone who is unauthorized.
Equity: Interest that a person earns on an asset.
Escheat: The process by which an institution is required to turn over unclaimed members’ account balances to the state for safekeeping, when the account has been inactive for a specific period of time. The state of Maryland maintains a database of unclaimed property. People can search the database for lost or misplaced property.
Escrow account: A trust account in which the lender holds funds for payment.
Executor: Someone in a will who is named responsible for distributing the funds and property in an estate to the rightful heirs.
Federal Deposit Insurance Corporation (FDIC): A U.S. government corporation created by the Glass-Steagall Act of 1933. It provides deposit insurance, which guarantees the safety of deposits in member banks up to $250,000 per depositor per bank.
Federal Reserve System: The central banking system in the United States that issues money and provides services to the federal government and other financial institutions.
Fiduciary: A person who holds property in trust under the terms of a trust agreement.
Finance charge: The amount of interest paid by the borrower to the lender on a loan.
Float: The amount of money deposited to an account that the financial institution cannot use immediately, because of the time it takes to process checks through the banking system.
Forgery: The signing, or altering, of another person’s name in an attempt to be fraudulent.
Health savings account (HSA): An account that people can use to save for medical expenses that are not covered by their health plan.
Hold: A specific amount of an account holder’s balance that cannot be withdrawn until a certain debit or check is posted.
Inactive account: An account that hasn’t had a deposit or a withdrawal within a certain (usually extended) period of time. See also dormant account.
Index: A statistical measure of change in an economy or a securities market. When referring to financial markets, an index is an imaginary portfolio of securities representing a particular market or a portion of it.
Individual account: An account where only the person who owns the account is permitted to make transactions.
Individual retirement account (IRA): A savings account in which individuals can save for retirement. An IRA offers the potential of its deposits being tax deductible.
Interest: The amount of money accrued (added to an account) or the cost (fees or charges) associated with the use of money.
Interest-bearing account: A bank account that earns interest over a specific period of time. Commonly, savings accounts are interest bearing. Some checking accounts are interest bearing.
Interest rate: The amount paid by a borrower to a lender over a certain period of time.
Joint account: An account that is owned by 2 or more people.
Liabilities: Claims (bills, invoices, etc.) against a corporation or person that are due to be paid.
Lien: The lawful right to sell the mortgaged or collateral property of those who fail to meet the obligation of a loan contract.
Linked account: An account connected to a person’s primary account.
Liquidity: The part of total assets that is available. Liquidity includes funds not held in fixed assets (such as property or an investment account) and not loaned to a person.
Loan-to-value (LTV) ratio: A number that measures the ratio of the mortgage amount to the property value. LTV is calculated by dividing the mortgage amount by the appraised value of the property. It is expressed as a percentage.
Maturity: The date when a note or a principal obligation becomes due and payable (its term ends).
Multi-factor authentication (MFA): A way to strengthen the level of security on a login by adding an additional end user authentication factor, such as a texted or emailed confirmation code. MFA helps to protect against fraudulent activities online.
Non-bank ATM: An ATM that does not display a bank’s name or logo. These ATMs usually have an added fee for their use.
Online banking: Account information and services available online from a person’s banking institution.
Original interest rate: An interest rate that was given at the time the account was opened.
Overdraft: Spending more than the available funds in an account, causing a negative balance.
Overdraft protection: A revolving line of credit that serves as a backup source of funds for a checking account. The protection helps avoid fees for spending more money than is in the account.
Payee: A person to whom a check or other form of financial obligation is made payable.
Periodic rate: A rate (such as interest) set on an account over a specific amount of time.
Personal identification number (PIN): A number that allows an account holder to gain access to an ATM or use a debit card or chip-equipped credit card.
Phishing: A way of attempting to acquire information such as user names and passwords by pretending to be a trustworthy entity in email or other electronic communication.
Point-of-sale terminal (POS): A terminal service that allows a banking customer to access account funds at the location where the sale is made.
Points: A loan discount used to adjust the yield on a loan. Points may adjust a loan to what market conditions demand.
Power of attorney: A legal document that authorizes another individual to act on the behalf of another person in the event that they cannot act for themselves.
Preauthorized payment: A payment set up in advance at a bank by an account holder to automatically make payments.
Prepayment penalty: A fee for repaying a loan before it was due.
Primary or principal residence: The permanent residence where a person claims to reside.
Prime rate: An interest rate charged by a financial institution for loans made to larger business borrowers. Prime is typically the best rate available.
Principal: The amount borrowed or the amount still owed on a loan, separate from the interest.
Private mortgage insurance (PMI): Insurance written by a private company that protects the mortgage lender against a potential loss incurred by a mortgage default (when a borrower stops making mortgage payments).
Promissory note: A written agreement between people in which a person or company agrees to pay another person or company a specific amount of money by a certain date.
Refinance: Replacing an old loan with a newer loan, generally offering better terms.
Revolving account: A specified line of credit that can be used repeatedly.
Routing number: A 9-digit number used to identify a financial institution.
Savings account: An account that has the purpose of saving money and accumulating funds.
Secured loan: A loan in which the borrower pledges some asset (for example, a car or property) as collateral for the loan. The collateral becomes a secured debt owed to the creditor who gives the loan. Auto loans are secured loans.
Service charge: An institution’s fee for a specific service the institution provides.
Simple interest: The interest on an outstanding balance that produces a declining finance charge with each payment of the installment loan made.
Split deposit: A transaction in which a portion of a deposit is credited to a person’s account and the balance is taken in cash. A split deposit can also be divided between 2 different accounts.
Stop payment: A verbal or written statement by an account holder stating that he or she no longer wishes to pay a specific check or draft. Once a stop payment is issued, funds cannot be drawn on that check (the check cannot be cashed or deposited).
Thrift institution: Financial institutions, such as mutual savings banks, savings and loan associations and credit unions.
Time deposit or CD: A deposit that cannot be withdrawn for a certain period of time without hefty penalties being applied.
Transaction limitations: Limits imposed by law on the number of electronic and telephone withdrawals and transfers from a deposit account. Federal law limits electronic and telephone transactions from all U.S. savings and money market accounts to 6 per statement cycle.
Transfer: Funds moved from one account to another.
Traveler’s checks: A check that functions just like cash and is protected if lost or stolen, often used during travel.
Treasury bills: A short-term debt obligation backed by the U.S. government with a maturity of less than 1 year.
Trust: A person who holds property for the benefit of someone else.
Unsecured loan: A loan that is issued and supported only by the borrower’s creditworthiness, rather than by a type of collateral. An example of an unsecured loan is a regular credit card.
Variable rate: A loan plan in which the interest charged over the life of the loan may vary.
Wire transfer: A method of transferring funds electronically from one person or institution to another.
Zero fraud liability: The practice of preventing an account holder from being held responsible for charges incurred on a lost or stolen card.