Essential Banking FAQ & Answers is being provided to help our students. Banking can be a complex topic with many different aspects to understand.
Essential Banking FAQ & Answers
Below are some frequently asked questions about banking along with their answers:
What is a checking account?
A checking account is a type of deposit account that individuals open at financial institutions for the purpose of withdrawing and depositing money. Checking accounts are very liquid, meaning you can access your money easily through checks, automated teller machines (ATMs), electronic debits, and bank apps.
What is a savings account?
A savings account is a deposit account held at a bank or other financial institution that provides a modest interest rate. The primary purpose of a savings account is to help you save money while earning some interest.
What is a Certificate of Deposit (CD)?
A CD is a type of time deposit offered by banks with a fixed term. It usually offers a higher interest rate than a regular savings account but has penalties for early withdrawal before the maturity date.
What is online banking?
Online banking, also known as internet banking or web banking, is an electronic payment system that enables customers to conduct a range of financial transactions through the financial institution’s website.
What is a credit score?
A credit score is a numerical expression based on a level analysis of a person’s credit files, to represent the creditworthiness of that person. It is primarily based on credit report information typically sourced from credit bureaus.
What are the differences between credit and debit cards?
A debit card allows bank customers to spend money by drawing on funds they have deposited at the bank. A credit card allows consumers to borrow money up to a certain limit to purchase items or withdraw cash.
What is an overdraft?
An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero. In this situation, the account is said to be “overdrawn”. Banks may charge a fee for this service.
What is the routing number?
A routing number is a nine-digit code used in the United States, which identifies the financial institution of the account holder. It is used for electronic transactions such as funds transfers, direct deposits, digital checks, and bill payments.
What is a wire transfer?
A wire transfer is an electronic transfer of funds across a network administered by hundreds of banks around the world. They are relatively quick and are commonly used for sending money overseas.
What is a bank loan?
A bank loan is when a bank offers to lend money to consumers for various purposes such as buying a home (mortgage), car (auto loan), or for personal use (personal loan). These loans are repaid over time with interest.
What is an interest rate?
An interest rate is the amount a lender charges for the use of assets expressed as a percentage of the principal. The interest rate is typically noted on an annual basis, known as the annual percentage rate (APR).
What is a mortgage?
A mortgage is a type of loan used for the purchase of real estate. The property purchased serves as collateral for the loan. Mortgages are repaid over a long period, usually 15 to 30 years.
What is a fixed-rate mortgage?
A fixed-rate mortgage is a mortgage loan where the interest rate on the note remains the same throughout the term of the loan, as opposed to loans where the interest rate may adjust or “float”.
What is an adjustable-rate mortgage (ARM)?
An adjustable-rate mortgage is a type of mortgage in which the interest rate applied on the outstanding balance varies throughout the life of the loan. Normally, the initial interest rate is fixed for a period of time, after which it resets periodically, often every year or even monthly.
What is home equity?
Home equity is the market value of a homeowner’s unencumbered interest in their real property—that is, the difference between the home’s fair market value and the outstanding balance of all liens on the property.
What is home equity loan?
A home equity loan is a type of loan in which the borrower uses the equity of his or her home as collateral. These loans are often used to finance major expenses such as home repairs, medical bills, or college education.
What is a bank chargeback?
A bank chargeback occurs when a credit card holder disputes a charge on their account. The bank then reverses the charge pending further investigation. If the dispute is resolved in the cardholder’s favor, the charge is permanently removed; if not, the charge is reapplied to the card.
What is a bank reconciliation?
A bank reconciliation is the process by which a company ensures that its financial records (check register, general ledger account, balance sheet, etc.) are correct and that they match up with the bank’s records, as per the bank statement.
What is a current account?
A current account, also known as a business account, is a type of deposit account for individuals who run businesses, including firms, companies, public enterprises, entrepreneurs, and freelancers. Unlike savings accounts, a current account has no limits on transactions.
What is net banking?
Net banking, also known as online banking or internet banking, refers to the banking services provided by a bank over the internet. Customers can access various services, such as fund transfers, bill payments, and viewing account statements, through a bank’s website or mobile application.
What is KYC in banking?
KYC, or Know Your Customer, is a process that banks and other financial institutions use to verify the identity of their customers. This can include identity verification, address verification, and assessing potential risks of illegal intentions towards the banking relationship.
What is a bank statement?
A bank statement is a summary of financial transactions that have occurred over a specific period on a bank account held by a person or business with a financial institution.
What is a cashier’s check?
A cashier’s check is a check guaranteed by a bank, drawn on the bank’s own funds and signed by a cashier or teller. Cashier’s checks are treated as guaranteed funds because the bank, rather than the purchaser, is responsible for paying the amount.
What is a bank draft?
A bank draft is a payment on behalf of a payer, which is guaranteed by the issuing bank. A bank draft functions similarly to a cashier’s check, providing the convenience of a check, without the risk of bounced checks.
What is a SWIFT code?
A SWIFT code (Society for Worldwide Interbank Financial Telecommunication code) is a standard format of Business Identifier Codes approved by the International Organization for Standardization (ISO). It is a unique identification code for both financial and non-financial institutions used when transferring money between banks, particularly for international wire transfers.
What is the IFSC code?
The Indian Financial Systems Code (commonly known as IFSC) is an alphanumeric code that uniquely identifies a bank-branch participating in the two main electronic funds settlement systems in India: the Real Time Gross Settlement (RTGS) and the National Electronic Funds Transfer (NEFT) Systems.
What is an unsecured loan?
An unsecured loan is a loan that is issued and supported only by the borrower’s creditworthiness, rather than by any type of collateral. Unsecured loans, sometimes referred to as signature loans or personal loans, are obtained without the use of property as collateral.
What is a Mutual Fund?
A mutual fund is a type of investment vehicle consisting of a portfolio of stocks, bonds, or other securities, which is managed by an investment company. Individual investors buy shares in the fund and the fund’s profits or losses are then divided among its shareholders.
What is a SIP?
A Systematic Investment Plan (SIP) is a method of investing money in mutual funds. You can set up a SIP that allows you to invest a certain pre-determined amount at a regular interval (weekly, monthly, quarterly, etc.).
What is the difference between a bank and a credit union?
The primary difference between a bank and a credit union is that a bank is a for-profit financial institution, while a credit union is a nonprofit. The key idea is that a bank is owned by shareholders who seek profits while a credit union is owned and operated by its members.
What is a foreign currency account?
A foreign currency account is a type of bank account in the currency of another country. This allows the account holder to hedge against currency fluctuations and also makes transactions with foreign countries easier.
What is a private bank?
A private bank is a type of bank or financial institution that offers services to private individuals, typically high-net-worth individuals, including wealth management and investment advisory services.
What is mobile deposit?
Mobile deposit, or remote deposit capture, allows a customer to deposit a check into their bank account by taking a photo of it with their smartphone or tablet.
What is a Roth IRA?
A Roth IRA (Individual Retirement Account) is a special type of retirement account where you pay taxes on money going into your account, and then all future withdrawals are tax-free.
What is a direct deposit?
Direct deposit is an electronic payment method that allows your employer to electronically transfer money directly into your bank account, rather than paying you with a paper check.
What is a money market account?
A money market account is a type of savings account that typically comes with a higher interest rate based on the deposit amount. Money market accounts also offer check-writing and debit card capabilities.
What is a personal identification number (PIN)?
A personal identification number (PIN) is a security code for verifying your identity. These codes are commonly used for ATM access and also act as a password to secure your personal account information.
What is an Automated Teller Machine (ATM)?
An Automated Teller Machine is an electronic banking device that allows customers to complete basic transactions without the aid of a branch representative or teller. Customers can withdraw cash, deposit checks and cash, check their account balances, and sometimes, make bill payments.
What is a balance transfer?
A balance transfer is the process of transferring high-interest debt from one or more credit cards to another card with a lower interest rate. This strategy can help consumers save money on interest fees and pay off debt faster.
What is a bank guarantee?
A bank guarantee is a promise from a bank or other lending institution that if a particular borrower defaults on a loan, the bank will cover the loss. It is a guarantee that a bank provides to a third party in case the bank’s client fails to fulfill their commitment.
What is a credit report?
A credit report is a detailed breakdown of an individual’s credit history prepared by a credit bureau. It includes personal information, a credit summary, public records, and inquiries about one’s credit.
What is a cash advance?
A cash advance is a service provided by credit card issuers that allows cardholders to immediately withdraw a sum of cash, often at a high-interest rate.
What is compound interest?
Compound interest is the interest on a loan or deposit that is calculated based on both the initial principal and the accumulated interest from previous periods. It is interest on interest.
What is a lien?
A lien is a claim or legal right against assets that are used to secure the repayment of debt. A bank or other entity can have a lien on a property until the homeowner pays off their mortgage.
What is a financial advisor?
A financial advisor is a professional who provides financial services to clients. They advise individuals on investments, taxes, estate planning, retirement, and insurance needs.
What is a trust account?
A trust account is a legal arrangement through which funds or assets are held by a third party (the trustee) for the benefit of another party (the beneficiary).
What is a joint account?
A joint account is a bank account shared by two or more individuals. Any individual who is a member of the joint account can withdraw from the account and deposit to it.
What is overdraft protection?
Overdraft protection is a service offered by banks that allows account holders to temporarily make transactions that exceed their current account balance, preventing returned checks or declined card payments. This service usually comes with a fee.
What is an Initial Public Offering (IPO)?
An Initial Public Offering (IPO) is the first sale of stock by a company to the public. Before an IPO, a company is considered private. The IPO process is also referred to as “going public.”
What is a Bank Identification Number (BIN)?
A Bank Identification Number (BIN) is the initial four to six numbers on a credit card that identify the issuing institution. The BIN helps merchants evaluate and assess their payment card transactions.
What is phishing?
Phishing is a cybercrime in which a target is contacted by email, telephone, or text message by someone posing as a legitimate institution to lure individuals into providing sensitive data such as personally identifiable information, banking, and credit card details.
What is inflation?
Inflation is the rate at which the general level of prices for goods and services is rising and subsequently, purchasing power is falling. Central banks attempt to limit inflation — and avoid deflation — to keep the economy running smoothly.
What is bankruptcy?
Bankruptcy is a legal proceeding involving a person or business that is unable to repay their outstanding debts. The bankruptcy process begins with a petition filed by the debtor, which is most common, or on behalf of creditors, which is less common.
What is a fiduciary?
A fiduciary is a person or organization that acts on behalf of another person or persons to manage assets. They are obliged to put their clients’ best interest ahead of their own, regardless of any potential profit to themselves.
What is a debit card?
A debit card is a payment card that deducts money directly from a consumer’s checking account to pay for a purchase. Debit cards eliminate the need to carry cash or physical checks to make purchases.
What is interest rate?
The interest rate is the amount a lender charges for the use of assets expressed as a percentage of the principal. The interest rate is typically noted on an annual basis known as the annual percentage rate (APR).
What is liquidity?
Liquidity refers to the ease with which an asset, or security, can be converted into ready cash without affecting its market price. The most liquid asset, and what everything else is compared to, is cash.
What is a credit union?
A credit union is a type of financial cooperative that provides traditional banking services. Ranging in size from small, volunteer-only operations to large entities with thousands of participants, credit unions can be formed by large corporations, organizations, and other entities for their employees and members.
What is a commercial bank?
A commercial bank is a type of financial institution that accepts deposits, offers checking account services, makes various loans, and offers basic financial products like certificates of deposit (CDs) and savings accounts to individuals and small businesses.
What is mobile banking?
Mobile banking is a service provided by a bank or other financial institution that allows its customers to conduct financial transactions remotely using a mobile device such as a smartphone or tablet.
What is an Automated Clearing House (ACH)?
The Automated Clearing House (ACH) is an electronic network for financial transactions in the United States that processes large volumes of credit and debit transactions in batches.
What is a budget?
A budget is an estimation of revenue and expenses over a specified future period of time and is usually compiled and re-evaluated on a periodic basis.
What is a secured loan?
A secured loan is a loan in which the borrower pledges some asset (e.g., a car or property) as collateral for the loan, which then becomes a secured debt owed to the creditor who gives the loan.
What is microfinance?
Microfinance is a category of financial services targeted at individuals and small businesses who lack access to conventional banking and related services. It involves the provision of small loans, savings, insurance, and other financial services.
What is a treasury bill?
Treasury bills, or T-bills, are a short-term debt obligation backed by the U.S. Treasury Department with a maturity of one year or less. T-bills are sold in denominations of $1,000 up to a maximum purchase of $5 million.
What is a stock exchange?
A stock exchange is a marketplace where stock brokers and traders can buy and sell securities, such as shares of stock, bonds, and other financial instruments.
What is a bond?
A bond is a fixed income instrument that represents a loan made by an investor to a borrower (typically corporate or governmental). Bonds are used by companies, municipalities, states, and sovereign governments to finance projects and operations.
What is an exchange rate?
The exchange rate is the value of one country’s currency versus the currency of another country or economic zone. It plays a vital role in trade between nations, affecting the relative prices of goods and services between countries.
What is a letter of credit?
A letter of credit is a document issued by a financial institution, or a similar party, assuring payment to a seller of goods and/or services provided certain documents have been presented to the bank.
What is a bear market?
A bear market is a condition in which securities prices fall and widespread pessimism causes the stock market’s downward spiral to be self-sustaining. Investors anticipate losses as pessimism and selling increase.
What is a bull market?
A bull market is the condition of a financial market in which prices are rising or are expected to rise. The term “bull market” is most often used to refer to the stock market but can be applied to anything that is traded, such as bonds, currencies, and commodities.
What is a portfolio?
A portfolio is a collection of financial investments like stocks, bonds, commodities, cash, and cash equivalents, as well as their fund counterparts. The portfolio is generally managed by a financial advisor or an investment manager.
What is Gross Domestic Product (GDP)?
Gross Domestic Product (GDP) is the total monetary or market value of all the finished goods and services produced within a country’s borders in a specific time period. It functions as a comprehensive scorecard of a given country’s economic health.
What is an equity fund?
An equity fund is a mutual fund that invests principally in stocks. It can be actively or passively (index fund) managed. Equity funds are also known as stock funds.
What is E-banking?
E-banking, also known as electronic banking, is the use of electronic means to conduct banking activities. This includes activities such as money transfers, checking account balance, paying bills, and applying for financial products.
What is venture capital?
Venture capital is a form of private equity financing that is provided by venture capital firms or funds to startups, early-stage, and emerging companies that have been deemed to have high growth potential.
What is an annual percentage rate (APR)?
The annual percentage rate (APR) is the annual rate that is charged for borrowing or earned through an investment. APR does not take into account compounding, while the annual percentage yield (APY) does.
These are additional terms and concepts that are essential to understanding the banking and financial world. Remember that professional financial advice is invaluable for making informed financial decisions. Always consult with a professional when in doubt.
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