Banking Terms and Definitions
Understanding common bank terms.
Let’s simplify. Bank terms aren’t part of everyday conversations. So when you need to open a new account or make a more complicated financial transaction, you’ll typically see some unfamiliar words or acronyms. Use this glossary to refresh your understanding of what they mean so you can make confident financial decisions.
529 College Savings Plan
An investment account that offers tax-free earnings growth and tax-free withdrawals when funds are used to pay for qualified higher education expenses (or up to $10,000 annually for K – 12). Typically, a parent or grandparent opens the account and names a child as the beneficiary. Each plan is sponsored by an individual state and managed by a financial services company. You don’t have to be a resident of a particular state to invest in its plan.
A free banking service that helps protect your account from fraudulent activity and from potential overdrafts. Banks typically offer different types of alerts. For example, security alerts are general warnings about possible fraudulent activity to watch out for. Balance alerts are email or text messages you choose to receive that notify you if your balance is low or if there’s been suspicious activity on your account.
A financial product offered by insurance companies that can provide you with a regular income stream during retirement. Annuities can be purchased in a lump sum or in a series of payments, and you can decide if you want to receive your payout over a defined number of years or for life.
An automated teller machine (ATM) is a machine found at bank branches and public places, like airports and malls, that allows you to withdraw cash from your account and check your balances using an ATM or debit card.
Automatic Savings Plan
A service that helps you to put away savings on a regular basis. For example, after depositing your entire paycheck into your checking account, this plan will automatically transfer the amount you choose into your savings account.
A measure used to express changes in interest rates, one basis point (BPS) equals 1/100th of 1 percent. When the Federal Reserve cuts interest rates by 25 basis points, it means rates go down by .25% or ¼ of 1 percent.
Coverdell Education Savings Account (ESA)
Like a 529 Plan, the ESA is a tax-advantaged way to save for the college (or K – 12) tuition and related expenses of a designated beneficiary. Earnings accrue in the account tax-free and can be withdrawn tax-free for a qualified educational purpose. Some details differ so you should compare features of each.
A company that tracks the credit history of individuals and sells the information to banks and other lenders to help them decide whether to extend credit to you. The credit bureau gathers information about you from banks and credit card companies and from your phone companies and utilities. The three major credit bureaus are Equifax, Experian and TransUnion. Also known as credit reporting agencies (CRA).
Compiled by a credit bureau and used by banks when making a loan decision about you, this report details your credit and payment history, including your past and current loans. It’s a good idea to check your credit report regularly to detect possible fraudulent activity and to correct errors. You’re are entitled to a free copy once every 12 months from each of the three major credit bureaus by contacting AnnualCreditReport.com.
A numerical value, based on your payment history, how much you currently owe, how much unused credit you have available and other factors, that represents your creditworthiness. Banks and other lenders buy this score from credit bureaus to help them decide if they should extend you credit. The higher your score the better your credit and the more likely you are to receive credit at a favorable rate. See FICO score for more information. You can purchase your credit score from AnnualCreditReport.com when you order your free credit report.
The deadline, set by your bank, for crediting deposits to your account on the same day. Deposits received after the cut-off time are considered received on the next business day. There may be different cut-off times for different types of deposits, such as mobile deposits and deposits made at a KeyBank ATM.
Debt Consolidation Loan
A new loan you take out in order to pay off a number of smaller loans. The advantage is that the new loan will usually have a lower interest rate and/or lower monthly payments. For example, you might take advantage of a good credit card offer to pay off higher rate cards, or you might take out a home equity line of credit to consolidate higher cost debt.
A credit account is delinquent if you haven’t made your payment on time. A reported delinquency to the credit bureau will hurt your credit score, so it’s important to bring your payments up to date.
An account that has had no customer-initiated activity for a prolonged period of time may be considered dormant. Dormancy periods vary by state. After several years of dormancy, the bank may be required to turn over the funds in the account to the state.
A credit score widely used to determine creditworthiness. Scores can range from 300 – 850, with 700 considered good and 800 excellent. The Fair Isaac Corporation calculates your credit score and provides it to credit bureaus for inclusion in your credit report.
A money manager who is bound to invest your money strictly in your best interests. Registered investment advisors have a fiduciary responsibility to their clients. Other non-fiduciary money managers are legally required to invest your funds ‘suitably,’ but they’re not obliged to put your interests ahead of their own.
The mortgage lender’s legal right to take control of a property and sell it if the homeowner defaults on the mortgage payments. In some cases, the lender may wish to avoid foreclosure and be open to refinancing the mortgage on more affordable terms.
Foreign ATM Fee
A fee charged when you use your debit or credit card to withdraw funds from an ATM outside the United States. The fee is typically a percentage (1% - 3%) of the amount of the ATM withdrawal.
Funds Availability Policy
A bank’s policy that states when funds that have been deposited into your account become available for you to use. You can learn about Key’s funds availability policy by calling 1-800-KEY2YOU or visiting a branch.
Recognition that you have a good payment record on your loan or credit card. Different lenders have different definitions, but for most credit cards this means that you are making at least the minimum payment on time every month. If you fail to stay in good standing, it will affect your credit report and credit score and make it more difficult for you to qualify for credit in the future.
There are two types of grace period. The first refers to a set number of days after the loan payment due date when you can make your monthly loan payment without penalty. You should check your loan documents for the grace period that applies to your account. The second is the grace period for a credit card, which is the period between the end of a billing cycle and the date your payment is due.
Health Savings Account
If you have a High Deductible Health Plan, this is a tax-advantaged way to save for deductibles, co-pays and certain other expenses not covered by your plan. Funds can be withdrawn from the account for a qualified health purpose and roll over from year to year. Contribution limits for 2020 are $3,550 for an individual and $7,100 for a family.
A deposit account with interest tiers may pay a higher rate as your balance grows to the next tier. For example, an account may have 2 tiers, from $0 - $999.99 and $1,000 and above. Once your account balance reaches $1,000 you will begin to earn interest at the rate posted for that tier. A bank may reserve the right to pay the same rate on multiple tiers.
Money Market Fund
A type of mutual fund that invests in cash and low-risk short-term securities. Money market funds are considered safe and liquid investments, a good place to keep a sum of money that you know you’ll need to use in the near future. Although their names are similar, money market funds and money market accounts are not the same. Unlike a money market account, which is a bank account, a money market fund is an investment not insured by the FDIC.
The amount due to discharge your debt, which includes the principal balance, interest and fees. If you’re paying off your loan early, it might also include an early payment penalty.
A check with a future date written on it. For example, you are writing a check today but the date you write on a check is a month from now. One reason for writing a post-dated check is to delay payment, perhaps because you don’t have sufficient funds in your account to cover it right now. Be aware that the payee has the right to present the check for payment early and most banks will cash it, unless you have issued a stop payment.
The order in which banks make credits and debits to your account at the end of each business day. Daily transactions on your account are processed in a batch in the evening. The order in which they post varies by bank and are typically described in your account disclosure information. If your account overdrafts, the order in which items post can make a difference in the number of overdraft fees you would incur.
The interest rate banks charge to their most creditworthy clients, usually large corporations. The rates of many credit cards and variable rate consumer loans, like home equity lines of credit, are tied to the prime rate, often expressed as Prime + X%. The WSJ Prime Rate is published by the Wall Street Journal, based on its survey of the largest banks. It is widely used by many banks.
The portion of the original amount you borrowed that you still have left to pay on your loan or mortgage. Note that the principal balance does not include interest or fees.
Remote Check Deposit
A way to deposit a check into your account without visiting the bank. The check is scanned and transmitted to the bank by an encrypted internet connection. See also Mobile check deposit.
Required Minimum Distribution (RMD)
The minimum amount you need to withdraw from your traditional IRA, SEP-IRA, Simple IRA or qualified retirement plan once you reach the age of 70 ½. The RMD is calculated each year by dividing the balance in your account by distribution period or life expectancy. You can find a Required Minimum Distribution worksheet at IRS.gov.
A retirement savings account on which you pay taxes on the money you contribute but withdraw funds tax-free, meaning there’s no tax on the earnings. There are limits on the amount of money you can contribute each year and rules for withdrawal. This account is especially attractive if you think you’ll be in a higher tax bracket in later years.
A 9-digit number that identifies your bank and allows financial institutions to know where the money is coming from and where it is going, so one bank is not confused with another. Along with your bank account number, it is required for financial institutions to process direct deposits, checks, auto payments and wire transfers. You’ll find your bank’s routing number imprinted in the lower left corner of your checks. If you don’t have checks, you can find the routing number on the bank’s website or by calling your bank branch. Some banks may have different routing numbers for different transactions such as for wire transfers. KeyBank has different routing numbers for each state.
Safe Deposit Box
A container, typically a metal box, available for rent in many bank branches, to keep your documents and valuables safe. Safe deposit boxes come in different sizes and can be accessed during normal banking hours.
A mortgage based on your available equity in a house that already has a first mortgage, usually the original mortgage you used to buy the house. A second mortgage can be a home equity loan, where you withdraw the funds at a fixed rate in one lump sum, or a home equity line of credit, a variable rate line that replenishes itself as you make your payments.
An order to the bank not to pay a check you have written on your account. You may want to stop payment if you think the check has gotten lost, if it was in the wrong amount or if you canceled the purchase. The bank will try to honor your stop payment unless the check has already been processed. There is typically a fee for this service.
An electronic copy of a check, produced by your bank to speed up the check payment process. It is considered a legal substitute for the paper check it replaces. If you need proof that you made a payment, the bank may send you a substitute check.
A checking account that maximizes your earnings by ‘sweeping’ unused funds into a higher interest account at the end of the day. At KeyBank, depending on the type of account, your funds may be swept into a higher-interest FDIC-insured deposit account or into an investment account.
An automated method of banking by phone. At KeyBank, you can access your accounts using your account number and telephone access code. The number is 1-800-KEY2YOU. You can also speak to a customer service representative 24/7.
Insurance policies that protect the homebuyer and the mortgage lender in case unexpected claims arise against your property after you have closed, for example, from undisclosed heirs or unpaid tax bills. The title company searches available records to establish that the seller has clear title and then the insurance is issued. You pay for title insurance as part of your closing costs.
An individual retirement account, which allows you to invest your savings using pre-tax dollars. Once you retire, you will pay taxes on whatever you withdraw at your then-tax rate. There are limits on the amount of money you can contribute each year and rules for withdrawal.
Uniform Transfers to Minors Act (UTMA) Account
A bank account that allows you to gift money to a child tax-free until the child reaches the legal age in your state and takes control of the funds. Until then, you have full control of the funds, which you may only use for the benefit of the child.
A loan you qualify for based entirely on your creditworthiness. Credit cards and personal loans are examples of unsecured loans. Rates for unsecured loans may be higher than rates for secured loans, like home equity or auto loans, because they aren’t backed by tangible assets, like a house or a car.