Financial Terms Everyone Should Know

Financial Terms Everyone Should Know

Your quick guide to the words you’ll hear in our Credit Union.

Money conversations can sometimes feel like a different language. At Heritage, we believe understanding your finances shouldn’t be confusing. Here are some common financial terms explained in simple ways with real-life examples.

401K

A type of employer-sponsored retirement plan in which employees make tax-deferred contributions that are sometimes matched by their employers. 

APR (Annual Percentage Rate)

The rate of interest a borrower pays on a loan that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction. For example, if a credit card has a 20% APR, that’s the annual rate you’ll pay on balances you carry month to month.

ARM (Adjustable Rate Mortgage)                                                                                               

Fixed for a certain number of years then periodic changes based on index rate 

APY (Annual Percentage Yield)

A percentage rate reflecting the total amount of interest paid on a share account based on the interest rate and the frequency of compounding for a year.

Assets

Items owned by the member that have a financial value. 

Budget

A financial plan serving as an estimate and control over future operation. For example, if you earn $3,000 a month, your budget might look like:

• $1,200 for rent

• $400 for groceries

• $300 for savings

• $200 for utilities

• $200 for transportation

Checking Account

An account used for everyday spending and transactions often where direct deposits land. You might use your checking account to: Pay bills; Use your debit card; Withdraw cash from an ATM

Collateral

Items that can be taken and sold by the creditor if the member fails to pay, for example, when you take out a car loan, the vehicle itself often serves as collateral.

Cosigner

An individual who signs the note of another person as support for the credit of the primary signer and who becomes responsible for the obligation.

Credit Score

A number, roughly between 300 and 800, measuring an individual's credit worthiness. The most well-known type of credit score is the FICO® score. This score is derived from a mathematical formula that assigns numerical values to various pieces of information in your credit report. The score of 800 is the best rating you can receive. Financial institutions may use a credit score to help determine whether you qualify for a particular credit card, loan, or service.

Debit Card

A card linked to your checking account that allows you to pay for purchases using money you already have.

Debt

A debit may be an account entry representing money you owe a lender or money that has been taken from your deposit account. Common types of debt include: Credit cards; Student loans; Car loans; Mortgages

Debt-to-Income Ratio (DTI)

The percentage of a member's monthly gross income that goes toward paying installment debts. Generally, the higher the ratio, the lower is your capacity to repay the loan. The DTI is calculated by dividing total monthly debts by total monthly gross income. 

Default

A failure to meet a financial obligation. 

Delinquencies

A debt that was not paid by the loan’s payment date.

Direct Deposit
When your paycheck is electronically deposited into your account instead of receiving a paper check. For example, if payday is Friday, your employer automatically deposits your pay into your checking account that morning.

Emergency Fund
Money set aside specifically for unexpected expenses.For example, if your car breaks down or you have a medical bill, an emergency fund helps you cover the cost without using credit cards or loans. Financial experts often recommend saving 3–6 months of expenses.

Grace Period

A period of time after the due date when payment isn’t subject to late charges. 

Inflation
The gradual increase in prices over time, which reduces purchasing power. An example of this is if groceries cost $100 today but $110 next year, inflation has increased prices.

Interest

The term interest is used to describe the cost of using money, a right, share, or title in property.

Liquidity

The ability to convert the investment to cash. For example, money in a checking account is very liquid, while money in a certificate or retirement account may be less accessible.

Principal
The original amount of money borrowed or invested. For example, if you take out a $10,000 loan, that $10,000 is the principal. Interest is calculated based on that amount.

Probate

The process of proving the will of a deceased person is valid or if there is no will, defining the responsibilities and process to be followed for dealing with the estate. 

Net Worth

Difference between total assets and total liabilities 

• Example Situation:

  • Assets (what you own):

  • $10,000 savings

  • $5,000 car value

  • Total assets: $15,000

  • Debts (what you owe):

  • $3,000 credit card balance

  • Net worth:$15,000 - $3,000 = $12,000

Overdraft
When the amount of money withdrawn from a checking or share draft account is greater than the amount actually available in the account, the excess is known as an overdraft and the account is said to be overdrawn. For example, if you have $50 in your checking account but make a purchase for $75, your account becomes overdrawn by -$25.

IRA (Individual Retirement Account)

A retirement savings program for individuals to which yearly tax-deductible contributions, up to a specified limit, can be made. The amount contributed is not taxed until withdrawn. Withdrawal is not permitted without penalty until the individual reaches age 59 1/2.

Savings Account
An account designed to safely store money while earning interest.You might use a savings account to set aside money for: Vacations; Emergencies; Holiday spending; Future goals

Final Thoughts

Financial confidence starts with understanding the basics. The more familiar you are with these terms, the easier it becomes to make smart decisions with your money.

At Heritage, we’re here to help you learn, grow and reach your financial goals every step of the way. 

If you want to learn how to use these terms in your everyday life, take a moment to reflect on our “4 weeks to better financial habits” series HERE 

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References

Credit Union National Association (CUNA). CU FICEP Financial Counseling Certification Program, Parts 1 and 2.

Credit Union National Association (CUNA). Financial Counseling Certification Program, 4th ed.

National Credit Union Administration (NCUA). Glossary: I. MyCreditUnion.gov. https://mycreditunion.gov/learning-resources/glossary-i