Banking and Finance

Are You Financially Literate? Banking Edition

July 27, 2021

What is financial literacy? By definition, if you’re financially literate, you’re able to understand proper financial management skills and apply them accordingly. This means that you’re not only able to understand financial terms but the concepts behind them, and in a way that allows you to effectively plan your financial life, manage debt, and calculate your savings.

In order to become financially literate, you’ll need to first have a basic understanding of financial terms. Then, you’ll need to know how to implement them in your daily financial life. This includes learning how to create a budget, track your expenses, improve your credit score, manage debt, pay your taxes, and save for your retirement. While we have helpful resources for all of these subjects, it’s better to start off with the basics.

Here are the top financial terms you need to know when it comes to banking. Not sure what’s the difference between a checking account and a savings account? Need to understand banking fees and how to make a wire transfer? We’ve got the answers for you.

Banking Terms - Cheese

Checking Account vs. Savings Account

What is a checking account? Most people refer to any account they have at a bank as a “bank accounts,” but there are actually different kinds of bank accounts that you need to know about. A checking account is a deposit account at a bank that allows you to deposit and withdraw cash. It usually doesn’t earn you interest, but rather it’s a place to store your funds until you’re ready to make a withdraw using a debit card or other electronic transfer.

What is a savings account? A savings account is also a deposit account at a financial institution, but unlike a checking account, savings accounts are interest-bearing. These are different from certificate of deposit accounts (CDs), in that you are able to withdraw, usually, an unlimited amount of cash from your savings account. This is why norma savings accounts don’t come with high interest rates like CDs.

What is a CD (certificate of deposit)? CDs often come with a fixed interest rate over a set period of time. Interest rates on savings account change over time; CDs come with a fixed interest rate. When you put money into a CD, you’re receiving a higher interest rate in exchange for restricted access to the funds. The length of a CD ranges anywhere from three months to five years, all with their own interest rates and features.

What are the fees associated with checking and savings accounts? Most bank accounts come with fees. Banks charge monthly fees to offset their overhead costs. But, you can also incur fees for other activities and transactions. Some of the most common fees are minimum balance fees, wire transfer fees, overdraft fees, ATM fees, and fees for replacing lost or stolen cards.

Online Banks vs. Traditional Banks

If you’re looking to open checking accounts, or even a savings account, you’ll need to figure out whether you’re interested in just an online bank account or an account with a traditional bank. What’s the difference?

Well, you can perform online banking functions via a traditional bank. This means that if you have a BOA or Chase checking account, you can access your account and funds online. But, you also have the option to visit a physical branch to deposit funds via an ATM or to speak with an employee or financial advisor.

With online banks, there are no physical locations you can visit if you need assistance in-person, which also makes depositing a bit of a hassle sometimes. However, due to the lack of overhead costs, online banks can usually offer lower monthly banking fees and higher interest rates on savings accounts.

What are APY and APR?

Now that you know what type of account you’d like to open and where it’s important to begin to understand more technical banking terms such as APR and APY.

What is APY? APY stands for average percentage yield and indicates the total amount of interest you earn on a deposit account over the course of a year. While APY is based on the interest rate, APY gives you the most accurate idea of what you'll earn in a year.

What is APR? APR stands for annual percentage rate and it’s usually used to determine how much you’ll owe in interest on a loan over the course of a year. APR, in this sense, can help you determine which loan or credit card might be better for you.

So, as you see, APY and APR both deal with interest rates. However, APY refers to the percentage you’ll be able to receive back from your interest rate and APR is the percentage itself.

What is a Credit Score?

If you have a bank account and are budgeting your money, it might be time to consider a credit card as a way to improve your financial health. Or, you’ll also likely eventually take out a loan of some sort, whether for a house, car, or even your studies. 

All of these actions will affect your credit score, which is a number ranging from 300-850 that depicts a consumer's creditworthiness. Basically, depending on various factors such as previous debt and other financial activity, a credit score is a way to determine whether or not you’re eligible to take out other lines of credit. When determining your credit score, scoring systems will look at the number of open accounts you have, your total levels of debt, and repayment history. This includes everything from student loans to credit cards and any other form of loan you’ve taken out in the past.

And, while this isn’t directly tied to traditional banking, you are able to open credit cards at all major banks, including Bank of America, Chase, Discover Bank, and many more.