Test Your Financail Literacy with These Common Banking Terms

Many things can impact your money mindset. What may be common knowledge for some, is new for others. Review this straightforward list of common financial terms to see how many you already know.

Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage (ARM) is a home loan with an interest rate that changes periodically. The rate is typically fixed for an initial period, then adjusts at set intervals—such as annually or monthly. Depending on market conditions, your interest rate and monthly mortgage payment may increase or decrease after the fixed period ends.

Annual Percentage Rate (APR)

The Annual Percentage Rate (APR) represents the yearly cost of borrowing money. It includes interest and certain fees associated with the loan, giving borrowers a more complete picture of the total cost.

Annual Percentage Yield (APY)

The Annual Percentage Yield (APY) reflects the total amount of interest earned on an account in one year, including the effect of compound interest. APY commonly applies to savings accounts, checking accounts, and certificates of deposit.

Certificate of Deposit (CD)

A Certificate of Deposit (CD) is a savings account that holds your money for a fixed period of time in exchange for a typically higher interest rate than standard savings or checking accounts. Early withdrawals may result in penalties.

Checking Account

A checking account is designed for everyday transactions. It allows you to deposit wages, pay bills, and make purchases using a debit card, checks, or electronic transfers.

Credit Report

A credit report is a detailed record of your credit history compiled by credit bureaus. It typically includes personal information, credit accounts, public records, and credit inquiries. Lenders use this report to evaluate your creditworthiness when you apply for financing.

Conventional Loan

A conventional loan is a mortgage that is not backed by a government agency. These loans are offered and serviced by private lenders such as banks and financial institutions. Unlike government-backed loans, conventional loans are not insured against borrower default by a federal program.

Debit Card

A debit card is linked directly to your checking account and allows you to make purchases or withdraw funds electronically. Transactions made with a debit card deduct money directly from your account balance.

Debt-to-Income Ratio (DTI)

The percentage of your gross monthly income (pre-tax) that goes toward monthly debt payments, such as a mortgage, car payment, or credit card bills. Lenders calculate your DTI to determine your “creditworthiness,” also called “borrowing risk.”

Federal Deposit Insurance Corporation (FDIC)

An independent U.S. government agency that insures customer deposits up to $250,000 if your financial institution fails.

Home Equity Line of Credit (HELOC)

A revolving line of credit based on the value of your home or your invested equity. HELOCs are commonly used for home improvement projects, such as remodeling kitchens, bathrooms, bedrooms, or landscaping.

Health Savings Account (HSA)

A high-deductible savings account that can be used to pay for medical expenses. Eligibility depends on having a high-deductible health care plan.

Individual Retirement Account (IRA)

An account that allows you to invest toward retirement with tax-free growth or tax-deferred benefits.

Mortgage Points

Also called “discount points” or “buying down the interest rate,” mortgage points help reduce your interest rate. Points aren’t always paid up front—they can sometimes be added to the loan balance or paid by the seller.

Private Mortgage Insurance (PMI)

Insurance that protects the lender if a borrower defaults on a mortgage. PMI is usually required on conventional loans when a down payment is less than 20% of the home’s value.

Savings Account

An interest-bearing account used to store funds and help you reach short- or long-term financial goals.