Financial Words & Terms Explained
1099-INT form: A tax form that you get from your credit union or other financial institution that reports the payment to you of interest earned on your savings.
3-digit security code: The 3-digit (sometimes 4-digit) security code shown on a credit card lets merchants know that the card user is physically holding the card when he or she makes a purchase online or over the phone.
401(k): A retirement savings plan funded by employee contributions and, often, by partially matching contributions from the employer. See also Roth 401(k).
403(b): A type of IRA.
Account: A business agreement between two or more people or companies that includes the exchange of money or some other asset. For example, you might have a savings account, checking account, and/or credit card account.
Accounts payable: Money that a company owes to suppliers of goods and services purchased on credit. The accounts payable amount is a liability to the company. (Compare with accounts receivable.)
Account statement: A record of transactions in your credit union balance. If your credit union offers online banking, you generally can view your statements online.
Accounts receivable: Money that is owed to a company for goods and services it has provided to customers on credit. The accounts receivable amount is an asset to the company. (Compare with accounts payable.)
Adjustable-rate mortgage (ARM): A mortgage having an interest rate that can change at designated intervals, based on a published financial index.
Advertising: Marketing messages brought to you in various forms such as: newspapers, magazines, billboards, letters, radio, television, and online. Marketers pay for the space that carries their message to you. (The word "ads" is short for advertisements.)
Affinity card: A type of credit card issued jointly by a lending institution and a nonfinancial organization, such as a retail store or not-for-profit group. (Also known as a cobranded card because it bears each partner's name.) As an affinity cardholder, you usually are entitled to discounts or other special deals from the nonfinancial partner. In some cases, for example when the nonfinancial partner is an environmental group, using the card means that the group receives a donation in your name in the amount of a percentage of the purchase. Usually an affinity card will cost more to use than a credit card directly from a credit union or other lender.
American Stock Exchange: The American Stock Exchange (ASE) was acquired by the NYSE in 2008 and became NYCE Amex Equities in 2009. It handles about 10% of all American trades.
Annual gross income: Yearly income before taxes and most deductions.
Annual percentage rate (APR): Annual interest rate expressed as a percentage of the loan balance.
Annual percentage yield (APY): The effective annual rate of return taking into account the effect of annual percentage rate. Its usefulness lies in its ability to standardize varying interest-rate agreements into an annualized percentage number.
Annuity: A contract between a consumer and an insurance company or a financial institution. The consumer invests money with the insurance company in return for a stream of income. Earnings on the investment are tax-deferred until the consumer starts taking payments.
Antitrust: Activities to prevent business practices that restrain competition. (See trust.)
Asset: Anything of value that a person or organization owns. Examples include cash, securities, accounts receivable, inventory, and property such as land, office equipment, or a house or car. (Compare with liability. The same item can be both an asset and a liability, depending on your point of view. For example, a loan is a liability to the borrower because it represents money owed that has to be repaid. But to the lender, a loan is an asset because it represents money the lender will receive in the future as the borrower repays the debt.)
ATM: A device for conducting business at your credit union or other financial institution without a teller's help even when it's closed. With an ATM card, you can typically withdraw cash, transfer money between accounts, or check your account balances.
ATM card: A plastic card that allows you to get basic financial services from an ATM.
Automated Clearing House (ACH): A nationwide electronic funds transfer system that makes it possible to clear credit and debit transactions, and to exchange information between participating financial institutions.
Audit: A periodic check of an organization's financial and accounting records to ensure that its management and staff are following sound business practices. Some audits are required by law and may involve hiring an independent professional auditor. Also an IRS examination of an individual's or corporation's tax return.
Balance: 1. The amount of money in an account. 2. Comparing your personal check records with the checking account statement your credit union sends you to make sure the amounts match, or "balance." Also known as "reconciling" your checking account.
Bank: A business, with a state or federal government charter, that provides services such as paying interest on deposits, issuing and collecting checks, and making loans to businesses and/or consumers. Shareholders receive part of a bank's profit as a return on their investment in the bank, represented by the stock that they've purchased.
Bank holding company: A company that owns more than one bank.
Bankruptcy: The result of a court decision to excuse some or all of the debts of an insolvent person or corporation. Bankrupt corporations may go out of business. Bankrupt people usually have a hard time getting credit later or must pay very high interest rates for future credit, and may lose property, which a judge orders sold to repay as much debt as possible.
Barter: The practice of exchanging one good or service for another, without using money.
Beneficiary: Someone who benefits by receiving money from an insurance policy, will, inherited investment, or trust fund.
Biometrics: The identification of humans by their characteristics or physical traits, for example, hand prints or iris of the eye patterns. Used as a form of identification and access control.
Board of directors: People that shareholders have elected to oversee the management of a credit union, corporation, or other organization. The organization's CEO reports to the board. Directors meet periodically to fulfill their legal responsibility to represent the other shareholders' interests. Although most organizations pay their directors for their services, most credit union boards consist of unpaid volunteers.
Bond: A legal document that is a promise to repay borrowed principal along with interest on a specified schedule or certain date (the bond's maturity). Federal, state, and local governments, corporations, and other types of institutions raise capital by selling bonds to investors.
Bounced check: A check written for an amount exceeding the checking account balance. Bouncing a check has several negative consequences for the accountholder, including fees and a damaged credit report. When a financial institution closes a checking account due to bounced checks, the account holder's name becomes part of a national list of people who've mismanaged checking accounts—making it difficult to open another one.
Brand: A trademark or specific name identifying a product or an organization.
Brokerage firm: A company that assists buyers and sellers of investments for a fee.
Budget: A tool individuals, companies, and governments use to plan earnings and expenses for a period. A personal budget lists income and expenses such as housing, food, clothes, and entertainment. A balanced budget also includes saving a portion of income. To budget is to create a plan for funds, time, or other items.
Business cycle: The up-and-down movement of the economy. Over time, the economy goes through periods of expansion (rapid growth) and contraction (a slowing of the growth rate) or gross domestic product (GDP) to measure the business cycle.
Business loan: Also referred to as a commercial loan. A business loan is a bank loan granted for the use of a business usually given to business by a financial institution. Business loans are set up to be repaid by a certain date with a certain amount of interest.
Capacity: Your ability to repay a loan, estimated in part from your work history and current income.
Capital: 1. Wealth in the form of cash or property that can be used to earn income. 2. The net worth of a business, which is the amount by which its assets are greater than its liabilities. 3. What you own free and clear.
Car loan: Also referred to as an auto loan. A car loan is a personal loan that allows the potential buyer to pay the vehicle off in monthly payments instead of having to pay the full price all at once. The financial institution will pay off the car in full, while in return the borrower pays off the debt in monthly payments with an interest fee included. The vehicle is generally used as collateral if the borrower fails to make payments on the car loan. Auto loan rates, also known as car interest rates and auto interest rates, may vary based on your state of residence, approved loan amount, applicable discounts and your credit history. Seven Seventeen Credit Union offers new car loans and used car loans. Check out our auto loan calculator and compute your monthly payment.
Career: The work you choose as your occupation for life.
Cash: 1. Currency and coins. 2. The currency, coins, bank balances, and (negotiable) money orders and checks that a business owns.
Catch-up provisions: Additional contributions that allow people age 50 and older to save more money in 401(k)s.
Certificate: A debt instrument from a financial institution. When you purchase a certificate from your credit union (usually some multiple of $500 or $1,000), you're lending it that amount for a specific period, for which you'll earn a specific amount of interest. If you want your money back early, you'll usually have to pay a penalty.
Character: Your willingness to repay a loan, estimated, in part, from your credit history.
Charter: Government authorization to do business. A credit union or other financial institution must have a charter with a state or the federal government.
Check: A document that promises to pay a specific amount of money, taken from funds on deposit, to a specific party on demand. Some credit unions call a check a share draft.
Check register: The written record you keep of your checks as you write them and the deposits you make in your checking account. Each month when you get your checking account statement, you'll want to reconcile your account to know the maximum you can write checks for without being charged a nonsufficient funds penalty. Instead, you could monitor your account balance.
Checking account: An agreement that allows you to write a check for payment from deposits in a financial institution. Some credit unions call a checking account a share draft account. Business checking accounts for small businesses are available.
Circulation: The total of all currency in use at a given time.
Clearinghouse: A business that collects and prepares items such as coupons or checks for the business that issued them.
Closing price: The per-share price of a stock at the end of an official trading day.
Collateral: An asset you include in a loan agreement as something you will give up if you don't repay a loan. For example, the collateral on a car loan is usually the car itself. If you don't make payments on time, the lender can take the car and sell it to pay off the loan.
Collateralized debt obligation (CDO): A package of individual debts such as auto loans, bonds, or derivatives.
Commercial bank: A bank that specializes in business deposits and loans.
Commission: A fee an investor pays a broker for executing a transaction—buying or selling stock. The commission may be a flat fee—say $75 a trade, it may be set at a certain amount for each share of stock involved in the transaction, or it may be based on the total value of the transaction.
Commodity: A useful or valuable object. When used in reference to trade, commodities are mass-produced goods so common that they compete in the market only on price, not manufacturers' brands. An example is corn futures.
Common bond: Characteristics, such as employer or community, that link the members of a particular credit union. A common bond distinguishes members, who are eligible to receive services from that credit union, from the general public. See field of membership.
Compound interest: Interest calculated not only on the original principal (def. 3) that was saved but also on the interest earned earlier and left in the account.
Compounding: Earning interest on principal saved and on previously earned interest.
Compound period: The time that elapses before your financial institution pays interest/dividends on your investments. Different accounts have different compounding periods—daily, monthly, quarterly, or annually. The more frequent the compounding periods, the faster the money in your account grows.
Consumer Price Index (CPI): A measure of deflation that calculates the change in the cost of a fixed set of goods and services, including housing, electricity, food, and transportation. The federal government publishes the CPI, which is also called the cost-of-living index, monthly.
Cooperative: An arrangement in which each participant is part owner of an asset or group of assets. For example, people have formed a cooperative (sometimes known as a "co-op") to democratically share ownership of a business or apartment building. A credit union is a financial cooperative.
Corporate bond: A bond that corporations sell to investors to raise money.
Corporation: A type of business organization that exists separately from its owners. A corporation has a charter giving it legal rights and responsibilities that protect its owners by limiting their potential obligation and losses. Corporations raise capital and distribute ownership by selling shares of stock. They also pay taxes.
Co-sign: To accept joint responsibility for repaying someone else's loan. If the borrower doesn't make loan payments, the co-signer is liable for the debt.
Cost-of-living adjustment (COLA): A yearly change in workers' pay to erase the effect of inflation on purchasing power. A COLA is usually a wage increase, based on the Consumer Price Index.
Counterfeit: Fake, usually referring to phony currency. The Secret Service is in charge of investigating counterfeit money in the U.S.
Credit: A legal agreement in which a borrower receives something of value now by promising to pay the lender for it later. When the item of value is money, the agreement is called a loan. When the item of value is a product, the purchaser buys it "on credit." (See also finance.)
Credit bureau: A company that records borrowers' credit histories. The three largest U.S. credit bureaus are Equifax, Experian, and TransUnion.
Credit card: A plastic card that allows you to borrow money or buy products and services on credit. The lender that issues the credit card puts a dollar limit on its use, depending on your creditworthiness. (Compare with debit card.) Credit card rates (interest rates) are also based on creditworthiness.
Credit history: A record of loan repayment. Financial institutions send information about the loans they make to several companies/credit bureaus to keep as a reference for future lending. Each time you apply for a loan, the lender will check your credit history with these companies. As a consumer, you have certain rights to review your record and correct inaccuracies. A credit history is also called a credit record or credit profile.
Credit rating: A lender's estimate of how risky it is to lend you money. Your credit rating will be based on such factors as your income, your history of repaying debt, and your work record.
Credit report: A record of your credit history collected by a credit reporting agency.
Credit score: A three-digit number based on a mathematical formula that helps lenders decide whether to lend you money and at what price. The higher the score, the more likely you are to qualify for a loan. And the higher the score, the more likely you are to get a better interest rate. Variants of the score also can influence whether you can get a job or rent an apartment, or how much you pay for insurance coverage. The FICO score is the most widely used credit scoring model.
Credit union: A credit union is a not-for-profit financial cooperative whose members own it. You are eligible to join a particular credit union if you are in the field of membership defined in its charter . All members have the right to democratically elect a board of directors. The board gives the credit union's management and staff general instructions. Historically, credit unions encourage thrift among members and provide them with credit at a low rate.
Credit union member: Someone who meets the eligibility requirements for joining a credit union and who maintains a required minimum savings balance. A credit union's members own the credit union.
Credit Union National Association (CUNA): A not-for-profit trade association for credit unions. To join CUNA, credit unions pay dues. In return, CUNA represents credit unions' interests with federal government agencies and members of Congress. CUNA also provides information, public relations, professional education, and business development services to credit unions.
Creditor: A person who lends money to another person, institution, or company in exchange for interest on his or her money.
Creditworthiness: A lender's estimate of a borrower's ability to repay a loan.
Creditworthy: Having a favorable credit rating.
Currency: Paper money. Explore the federal government's American Currency Exhibit online and take a virtual tour of the Money Museum.
Debit card: A plastic card that you can use like a credit card. The difference is that credit cards let you borrow money for purchases, while debit cards make payment immediately and electronically from your ATM transactions.
Debt: A liability in the form of a bond, loan agreement, or mortgage, owed to someone else with the promise of repayment by a certain date—the debt's maturity.
Debt consolidation loan: A loan used to repay several other loans. Debt consolidation usually reduces the borrower's monthly payments by lowering the interest rate or extending the repayment period or both.
Debt instrument: A written agreement to repay a loan such as a bond or certificate.
Debt ratio: Also known as the debt-to-income ratio, debt ratio is a tool that helps lenders decide if the amount of debt a consumer has is prudent given the consumer’s income. To find your debt ratio, divide your long-term debt by your total gross income.
Debtor: Someone who is in debt or under financial obligation to another (opposed to a creditor).
Deductions: Amounts subtracted or withheld from your gross income (def. 1). Some deductions, such as taxes, are required by law. Others are elective. For example, you might have the option of putting part of your earnings aside in a pension plan, individual retirement account (IRA), or other savings account. You also might instruct your credit union to automatically regularly deduct a loan payment so that you don't have to remember to write a check each month (also called "payroll deductions").
Default: Failure to follow the terms of a loan agreement, usually by not making payments on time.
Deflation: A drop in overall prices, often the result of a shortage of money or credit. Deflation is the opposite of inflation.
Dependent: For tax purposes, a person who gets more than half of his or her financial support from someone else. A spouse can't be a dependent.
Deposit: 1. Money you place in a savings account at a financial institution. 2. Money you give to a seller as proof of your intention to buy a piece of property; also called "down payment." 3. To put money into your credit union account.
Deposit insurance: A system that guarantees that people who deposit their money in a financial institution are protected if the institution fails. Depending on the type of account and ownership, this protection generally totals $250,000 or more. Two government agencies provide this type of coverage: the National Credit Union Administration insures credit unions and the Federal Deposit Insurance Corp. covers banks. Some financial institutions buy similar coverage from private insurers.
Depository bank: A financial institution that holds excess money for other financial institutions such as your credit union.
Depreciation: Decrease in the value of an asset over time.
Derivative: A financial product that derives value from the assets that underly it. Investors can buy shares of derivatives, such as a packaged group of mortgage loans, hoping to earn income when (or if) the mortgages are repaid. These generally are high-risk investments.
Disability: Inability to work because of illness or accident.
Discount brokers: A brokerage firm that processes customer orders at lower prices than "full-service" brokers.
Diversification: The concept of not putting all your eggs in one basket. The opposite of diversification is "concentration"—where a large portion of the investor's money is invested in only one or a few stocks or other investment vehicles. Let's say that two investors have $30,000 to invest. The first diversifies her portfolio by investing $10,000 in 3 stocks, one of which is ABC Corp. The second investor concentrates her portfolio by investing $30,000 in ABC Corp. If ABC Corp. goes bankrupt and its stock becomes worthless, both investors will be upset. But the "diversified" investor (the first one) will only lose $10,000 while the "concentrated" investor will lose $30,000.
Dividend: The money a credit union pays its members for keeping their money in the credit union; often called interest. Also, periodic payments a company makes to its shareholders.
Dividend rate: A percentage that tells what money saved in a credit union will yield. (Credit union dividends are the same as interest earnings.) A dividend rate equals the amount of dividends you've earned divided by the balance in your account, expressed as a percentage. In the simplest example, a 5% dividend rate means that you'll earn $5 for keeping $100 in a savings account for one full year. (See also compounding.)
Dividend yield: The annual rate of return earned by a stockholder. To find a corporation's dividend yield, divide the dividends paid for the year per share of stock by the stock price. For example, if X Corporation paid a total dividend of $2 and its stock is trading at $32 per share, its dividend yield is 2/32, or 6.25%.
Down payment: An amount you pay at the time of purchase to reduce the total amount you have to finance.
Earned income: Money a taxpayer receives in the form of wages, tips, taxable scholarships, or fellowship grants.
Economist: Someone who studies how the force of supply and demand determines how resources are put to use and what they cost.
Electronic funds transfer (EFT): The electronic exchange or transfer of money from one account to another, either within a single financial institution or across multiple institutions, through computer-based systems.
Endorse: To sign the back of a check made out to you so that you can get the check amount in cash. The simplest endorsement is to sign your name exactly as it appears on the "payee" line. If instead of getting cash, you want to give the check to someone else, you can endorse it with the note: "Pay to the order of (the other person's name)."
Entrepreneur: Someone who starts his or her own business.
Equity: Owned assets. A stock or any other security representing an ownership interest in a company. Home equity is the difference between the current market value of the property and the amount the owner still owes on the mortgage.
Exchange rate: The rate at which you can convert one nation's currency into another (also called "foreign exchange rate"). An online exchange rate calculator will tell you what your money would be worth in any of several other countries.
Expense: A business's cost for such things as rent, electricity, and worker's pay. Your cost for such things as movies, snacks, clothes, and music.
Fair Credit Reporting Act (FCRA): The federal law that promotes accuracy and ensures the privacy of the information in consumer reports, including credit histories. The Federal Trade Commission enforces FCRA.
Fair Labor Standards Act: The federal law that sets such rules as those for child labor and workers' minimum wage and overtime pay.
Federal: Having to do with government on a national level.
Federal Home Loan Bank (FHLB): An organization the federal government created in 1932 to increase the funds available to those living during the Great Depression. It now focuses mostly on affordable housing projects.
Federal income tax: A tax levied by the United States Internal Revenue Service (IRS) on the annual earnings of individuals, corporations, trusts, and other legal entities. Federal income taxes are applied on all forms of earnings that make up a taxpayer's taxable income, such as employment earnings or capital gains.
Federal Reserve Bank: One of 12 regional banks that the federal government set up to help regulate the money supply by holding funds in reserve and lending money to member financial institutions. See Federal Reserve System.
Federal Reserve System: The central banking system of the U.S. (also called the "Fed"). Among other services, the Fed determines how much money the government needs to make available and helps credit unions and other financial institutions operate smoothly and safely.
Federal Trade Commission (FTC): The agency of the federal government that enforces a variety of federal antitrust and consumer protection laws. In general, the FTC works to help consumers exercise informed choice, such as by eliminating business practices that are unfair or deceptive.
FICA: Stands for the Federal Insurance Contributions Act. A U.S. law requiring a deduction from paychecks and income that goes toward the annual gross income, to a limit that changes annually. The Medicare share is 1.45% on all earnings. If you're self-employed, you're expected to pay both the employee and the employer share of FICA.
FICO score: The most widely used credit scoring model. A FICO score is between 300 and 850, with 850 being the highest score possible. A FICO score is made up of 35% payment history; 30% amounts owed; 15% length of credit history; 10% new credit; and 10% types of credit used.
Field of membership (FOM): Each credit union has a FOM, which describes how its members are united by a common bond such as where they work or live.
Finance: To pay for something with credit.
Financial Aid: Money for postsecondary education expenses such as tuition, fees, books, and room and board. Sources include postsecondary schools, private organizations, and federal and state governments. Types of aid include grants, scholarships, work-study, and student loans.
Finance company: A company that raises funds from investors or borrows from a bank to make loans to other individuals and/or businesses. Unlike a credit union or bank, a finance company does not accept savings deposits.
Fiscal year: An accounting period covering 12 consecutive months. A company's fiscal year is not always the same as the calendar year.
Fixed-rate mortgage: A mortgage that carries the same interest rate throughout the life of the loan.
Foreclosure: The process of taking possession of a mortgaged property as a result of someone’s failure to keep up mortgage payments.
Four Cs: The key factors a lender uses to determine your creditworthiness. They are character, capacity, collateral, and capital.
Free market: An economic system that operates according to the principle of supply and demand without government involvement.
Full-service brokers: Brokerage firms that offer a wide range of services to clients. Such services may include research materials and advice on what stocks, bonds, and/or mutual funds to buy and sell. A full-service broker's commissions and other account fees generally will be higher than the commissions and fees a discount broker charges.
Futures: A contract that requires delivery of a commodity, bond, currency, or stock index at a specified future date for a specified future price. Buying futures enables investors to lock in current prices, for instance, for a quantity of corn.
Go Direct®: A program offered by the U.S. Treasury and the Federal Reserve that encourages people to have their federal benefit checks directly deposited. Visit GoDirect.org or call 800-333-1795. The federal government required all benefits recipients to receive benefits payments electronically through this service or a credit union account by March 13, 2013.
Googolplex: The largest named number. A googol is 10 to the 100th power (1 followed by 100 zeros). A googolplex is 10 to the googol power (1 followed by a googol of zeros). The estimated number of atoms in the universe is less than a googolplex. In other words, there isn't enough matter in the universe to write a googolplex on.
Government-sponsored enterprise (GSE): A corporation created by Congress—but not owned by the government, such as the Federal Home Loan Bank—to provide services on behalf of the federal government.
Grace period: 1. Time during which a lender doesn't charge interest on credit card purchases. 2. Six months after college graduation during which undergraduates don't have to make federal student loan payments.
Grant: Financial aid awarded to students based on their financial need. You don't have to repay a grant.
Great Depression: A period of about 10 years, beginning in October 1929, during which many people lost their jobs and many companies went out of business throughout the world. Desperate unemployed workers took their families on the road to look for work. People who lived through the Great Depression still remember the daily hardship.
Gross Domestic Product (GDP): The total value of all the goods and services produced in a particular country in a particular year. In other words, the sum of all that nation's consumer and government spending and investment, plus exports, minus imports. Divide this figure by the country's population to derive its "GDP per capita."
Gross income: 1. For individuals, the amount you've earned before payroll deductions are subtracted. 2. For businesses, the amount of revenue from product sales minus the cost of producing the products that were sold. (Compare with net income .)
Guaranteed asset protection (GAP): Optional insurance that pays your unpaid auto loan balance in case your vehicle is stolen or destroyed.
Home equity line of credit (HELOC): A line of credit extended to a homeowner that uses the borrower's home as collateral. A home equity line of credit is different than a home equity loan in that the borrower is not advanced the entire sum up front.
Home equity loan: A type of loan in which the borrower uses the equity of their home as collateral.
Home loan: Also referred to as a mortgage loan. A home loan is a loan secured by real property through the use of a mortgage note. A home buyer or builder can obtain financing (a loan) either to purchase or secure against the property from a financial institution. Features of mortgage loans such as the size of the loan, maturity of the loan, interest rate, method of paying off the loan, and other characteristics can vary.
Hyperinflation: A period in which the rate of inflation is so high and rises so rapidly that the concept of inflation is not useful.
Identity theft: A form of stealing someone’s identity in which one person pretends to be someone else by assuming that person’s identity, typically to access resources or to obtain credit and other benefits, such as health care, in that person’s name.
Income: Earnings from a job or an investment.
Income tax: A payment to federal, state, and local governments based on individual or company earnings.
Individual retirement account (IRA): A special federal program that allows you, in some cases, to delay the payment of income tax on some money you save, which reduces the amount of tax owed. IRA rules determine how much money you can save under this program, how you can get your savings out, and how much tax you finally pay.
Inflation: A rise in the general price level of goods and services; inflation is the opposite of deflation. The Consumer Price Index and the Producer Price Index are the most common measures of inflation.
Insolvent: Unable to repay debts. See bankruptcy.
Insurance: Protection from certain losses in the future in exchange for periodic payments (see insurance premium). You can buy insurance that will pay you (or someone you name) specific amounts in case of death, injury, accident, or other damage.
Insurance premium: A periodic payment for protection against loss. The size of the payment is based on various risk factors. For example, your auto insurance premium depends partly on your age.
Interest: An amount paid for the use of someone else's money. You pay the credit union to use the money you borrow from it. The credit union pays you interest, also known as dividends to use the money you save there.
Interest income: Earnings from your credit union investments.
Interest rate: A percentage that tells what borrowed money will cost or savings will earn. An interest rate equals interest earned or charged per year divided by the principal amount, and expressed as a percentage. In the simplest example, a 5% interest rate means that it will cost you $5 to borrow $100 for a year or you'll earn $5 for keeping $100 in a savings account for a year. (The math is more complicated when the financial institution uses a daily or monthly interest rate. Another complication occurs when borrowers make loan payments and savers add or withdraw savings periodically during the year. See also compounding.) Interest rates on a home loan are referred to as mortgage rates or home loan rates.
Internal Revenue Service (IRS): The agency of the federal government that's responsible for collecting federal income and other taxes and enforcing the rules of the department of the treasury.
Inventory: A company's unsold products, finished and unfinished, and the raw materials used to make them.
Invest: To commit money to earn a financial return.
Investment: Something of value that you buy, expecting that it will provide income and increase in value.
Investor: Someone who buys an asset for the income it'll earn and the increased value it'll have in the future.
Job benefits: Something of value that an employer gives employees in addition to money. Job benefits vary widely from business to business and typically are available to full-time workers and often to part-time workers on a prorated basis. Benefits can range from health insurance to your own space in the company parking lot.
Large Cap: A company with a market capitalization of $10 billion or more. This term is usually used when referring to large-cap stocks.
Liability: Something owed to another party. (See also debt and loan. Compare with asset.) The same item of value can be both an asset and a liability, depending on your point of view. For example, to the borrower a loan is a liability because it represents money owed that has to be repaid. But to the lender, a loan is an asset because it represents money the lender will receive in the future the debt is repaid.
Lien: A legal claim that gives a lender or service provider the right to an asset when a borrower defaults. For example, if a lender has put a lien on your house and you don't repay your loan, the lender can take ownership of your house.
Line of credit: An arrangement between a financial institution and a consumer that establishes a maximum loan balance that the lender will permit the borrower to maintain. The borrower can draw down on the line of credit at any time, as long as he or she does not exceed the maximum set in the agreement.
Liquidity: Assets that you can easily convert to cash.
Loan: An agreement in which a lender gives money or property to a borrower, who has to repay or return it, with interest, at a specified time.
Loan officer: The person at a financial institution who reviews loan applications and decides to approve or reject them.
Loan refinancing: Is the replacement of an existing debt obligation with another debt obligation under different terms. Loan refinancing is done for various reasons including to get a better interest rate, consolidate debt, reduce repayment amount, etc. Car refinancing refers to the loan refinancing of your automobile.
Loan shark: A person who lends people money and charges an extremely high interest rate on the loan. Loan sharks are usurers who operate secretly, without government regulation, so that people who borrow from them have little or no consumer protection.
Loss: The amount by which the purchase price of something (usually an investment) exceeds the selling price.
Lump-sum investment: Money you invest all at once.
Mark: Victim or target of a scam .
Market capitalization: The total value of a company's outstanding shares of stock, those the company owns plus shares investors own. Market capitalization can be called invested capital. To find a company's market capitalization, multiply the number of shares the company has issued by the price per share.
Maturity: The date on which a financial obligation is due to be fully repaid.
Medicaid: A joint federal and state government program that pays for medical care for certain people who can't afford it.
Medicare: The federal government's hospital insurance plan, which pays for certain healthcare expenses for people age 65 or older and some disabled citizens. The Social Security Administration manages Medicare.
Medicare tax: The tax that funds the Social Security Administration's hospital insurance plan, which pays for certain health-care expenses for people age 65 and older and for some disabled citizens.
Member: Someone who belongs to a credit union. To join, you must be eligible according to the credit union's field of membership rules and make a minimum deposit. Once a member, you are a part owner, with equal voting rights in elections for the credit union's shareholders, who own shares in the bank.
Merchandise: Goods for sale.
Merchant: A person who sells goods for profit.
Mid Cap: Stocks from a company with market capitalization between $2 billion and $10 billion.
Minimum wage: The least amount an employer can pay affected workers, according to the federal government law known as the Fair Labor Standards Act. Some states have different minimum wage standards.
Mint: A government "factory" for making coins. Get information about the U.S. mint in Denver and about the Philadelphia mint.
Mobile banking: Mobile banking is used for performing balance checks, account transactions, payments, credit applications, and other financial transactions through a mobile device such as a mobile phone or tablet.
Money market: The system for buying and selling debt instruments or securities with terms of less than a year, and often less than 30 days. Money market T-bills, or other short-term vehicles.
Money market account: A special type of savings account that pays higher interest rates but requires higher minimum balances and may cap the number of monthly transactions.
Money order: A legal document that is a promise to pay the individual or business named on it a specified amount of cash when presented at a financial institution. Money orders are an alternative to paying by electronic funds transfer (EFT).
Mortgage: Also known as a mortgage loan or home loan, is a loan to buy real estate.
Mortgage-backed security (MBS): An Investor can buy shares in an MBS. The mortgages are required to be from an authorized, regulated financial institution and must have high credit ratings.
Mutual fund: An investment that a company makes on behalf of shareholders. The company sells shares in the fund and invests the money in a group of assets, usually securities. The fund's managers make investment decisions according to stated objectives.
Mutual savings bank: A bank whose depositors own it. Although a credit union's members own the credit union, the two institutions differ in many ways. They have different charters and are subject to the regulation of different government organizations. Furthermore, the board of directors of a mutual savings bank is paid (compared with a credit union's volunteer directors) and the owners of a mutual savings bank have voting rights in proportion to the amount of money on deposit (compared with the one-member-one-vote practice of most credit unions).
Nasdaq: National Association of Securities Dealers Automated Quotations system. The first electronic stock market, created in 1971. It lists more than 5,000 companies that do business in technology, biotechnology, communication, retail, financial services, media, transportation, and other industries.
National Credit Union Administration (NCUA): The independent federal agency that regulates, charters, and supervises federal deposits of more than 92 million account holders in all federal credit unions and in the overwhelming majority of state-chartered credit unions.
National Credit Union Share Insurance Fund (NCUSIF): An amount of money credit unions set aside by law to insure their members' money against loss. The NCUSIF protects savings up to $250,000 per account at all credit unions with federal charters and most with state charters.
Negotiable: Able to be sold or transferred to another party as payment of an obligation.
Net income: 1. For individuals, your total earnings minus your required and elective payroll deductions. Commonly known as "take-home pay." 2. For businesses, gross income (def. 2) minus all other expenses.
Net profit margin: The net income of a company as a percentage of its sales or revenue. If a company has sales or revenue of $2.5 million and net income of $350,000, its net profit margin is 350,000 divided by 2,500,000, or 14%. This ratio measures a company's operating efficiency (how much of its revenue it spends on expenses), its pricing strategy (how high above its costs can the company price its products), and the amount of profit per sale it makes.
Net worth: An individual's or company's total assets minus total liabilities. (Also known as capital , def. 2)
New York Stock Exchange (NYSE): The oldest and largest U.S. stock exchange. Formed in 1792, the NYSE sets policies, supervises member activities, lists NASDAQ.
Nonsufficient funds: The condition in which you don't have enough money in your checking account to pay off someone you wrote a check to. There's usually a penalty for doing this, so be sure to keep track of your money by balancing your account.
Not-for-profit: A special kind of corporation dedicated to education or charity, whose stockholders give up all financial benefits.
Obligation: A written promise or debt.
Online banking: Online banking allows you to view account balances, perform account transactions, make payments, submit credit applications, and perform other banking transactions on your computer.
Outstanding balance: A loan amount not yet repaid.
Overdraw: To write a check for more money than you have in your account. You'll be charged a penalty for being "overdrawn," so record all your checks and balance your checking account carefully and promptly. Or check your account online regularly.
Overdraft protection: A line of credit established when a checking account is open to protect the accountholder from bouncing a check. Should the accountholder write a check exceeding her or his account balance, the financial institution draws on the line of credit to fully clear the check. The account holder pays interest on those funds.
Overhead: Business costs—such as rent and utilities—that don't directly relate to the production or sale of goods and services.
Partnership: A business arrangement in which two or more people share in the ownership, profits, losses, and tax obligations.
Patent: Government protection for up to 20 years of your exclusive right to make and sell something you've invented. The U.S. Patent and Trademark Office's website answers FAQs and offers plenty of inventive games, puzzles, and activities.
Payday loan: An expensive way to borrow against your paycheck. A borrower writes a personal check payable to the lender for the amount he wishes to borrow plus a fee. The lender gives the borrower the amount of the check minus the fee. The lender holds the check for two weeks, then cashes it. If the borrower does not have the money to cover the check by the end of the two weeks, she can pay the fee again and the lender will wait another two weeks to cash the check. Typically, payday lenders charge about $15 per $100 borrowed. That translates into an Truth in Lending Act to disclose, in writing, the Federal Trade Commission calls these loans "very expensive credit" and urges consumers to consider alternatives before choosing a payday loan. Payday loans are also known as cash advance loans, check advance loans, post-dated check loans, and deferred deposit check loans.
Pension: A government-approved employee retirement plan.
Percent: Figured or expressed as a rate or proportion per 100. For example, 25% is 25 per 100—25% of these squares are green. (Don't use "percent" or % when percentage point is meant. An increase in a rate from 10% to 11% is a rise of one percentage point, but an increase of 10%).
Person-to-person (P2P) payments: An online technology that lets one person transfer money to another's account online or with a mobile device.
Personal identification number (PIN): A secret code that helps keep other people from using your credit card or debit card.
Phishing: The act of sending an email to a user falsely claiming to be a legitimate enterprise in an attempt to scam the user into surrendering private information that will be used for identity theft.
POP Money: A person-to-person payment service that allows members to send secure electronic payments to others no matter where they bank. The service can send money via online banking using an email address, mobile phone number, or account information.
Portfolio: All the investments a person or organization owns.
Prepaid card: Also called "stored value cards," with these plastic cards, the user pays money up front, gets a plastic card authorizing a certain amount of money, and then spends the value over time. Prepaid cards derive purchasing power from information stored in the card itself. In contrast, ATM and credit cards get their purchasing power from the computer system at the issuing financial institution.
Price-to-earnings ratio (PE ratio): A tool that helps investors evaluate companies. Calculate this ratio by dividing the price of one share of a company's stock by the company's earnings per share over a 12-month period.
Principal: 1. The amount borrowed, or the part of the amount borrowed that remains unpaid (not including future interest). 2. The part of a monthly payment that reduces the outstanding balance of a mortgage or other loan. 3. The original investment amount.
Producer Price Index (PPI): A measure of deflation that considers changes in wholesale prices. The federal government publishes the PPI monthly.
Profit: Business revenue minus all expenses and taxes.
Property: What you own, an asset.
Prorate: To divide or distribute proportionally. For example, while a full-time worker might receive full job benefits, a half-time worker might receive 50% of full-time job benefits.
Purchasing power: A measure of money's value in terms of what it can buy. Purchasing power tends to change over time, mainly because of deflation. Also called "buying power."
Real estate: Land, including any buildings or structures on it.
Receipt: A record of a financial transaction, such as a purchase or a loan payment.
Recession: A period of reduced economic activity often defined as two quarters or more of reduced gross domestic product (GDP).
Recovery: A period of increasing business activity signaling the end of a recession.
Remote deposit capture: The ability to deposit a check into a financial institution account from a remote location, such as an office or home, without having to physically deliver the check to the institution. This is typically accomplished by scanning a digital image of a check into a computer or smartphone, then transmitting that image to the financial institution.
Resource: Anything that helps work toward a goal, including people, materials, and assets.
Retail: The sale of goods to individuals instead of to institutions or other stores. (Compare with wholesale.)
Retirement: Withdrawal from an active working life.
Return: The increase in value of an investment over time.
Revenue: Total dollars a business receives for the goods and services it sells.
Risk tolerance: The degree of uncertainty an investor can handle in regard to a negative change in the value of his or her portfolio.
Roth 401(k): An employer-sponsored investment savings account funded with after-tax money. The account grows tax-free and withdrawals of earnings taken in retirement aren’t subject to income tax if you’re at least 59 ½ years old and have held the account at least five years. Unlike the Roth IRA, the Roth 401(k) has no income restrictions. See also 401(k).
Roth individual retirement account (IRA): Retirement savings vehicle where you make contributions on an after-tax basis, and earnings grow free of federal taxes. This means you don’t get a tax deduction now, but you won’t need to pay taxes on the earnings later. There are income limits for making a contribution. See also individual retirement account.
Royalty: The portion of the sales revenue paid to an author or composer for each copy of a work sold. Also, the payment to an inventor for each item sold under a patent.
Rule of 72: A shortcut for estimating how long it will take to double your money at a certain interest rate. Here's how it works: Divide 72 by the interest rate. The answer is the number of years it will take for any amount of money to double. For example, if your money in savings earned 3% interest, then you'd need (72/3 =) 24 years to double it. You also can use the Rule of 72 to estimate the interest rate needed to double your money in a certain number of years. For example, if you want your money in savings to double in 9 years, then you'd need to earn (72/9 =) 8% interest on it.
Salary: Earnings received for regular periods, usually weekly, biweekly, or monthly. Salary is usually based on duties you perform, not the number of hours you work per pay period.
Savings account: A business agreement in which a credit union or other financial institution agrees to hold and pay dividends on money you've deposited. You may withdraw some or all of your money, but not by writing a share draft or check.
Savings and loan association (S&L): A business, with a state or federal government charter, that takes deposits from individuals and uses them to make loans, especially mortgage loans. Depositors or shareholders receive part of an S&L's profits as a return on their investment in the S&L, represented by the money they've deposited or the stock that they've purchased.
Savings bank: Another name for mutual savings bank.
Scam: Purposely distorting the truth in order to get someone else to part with something of value. Scams can be small or large operations involving few or many people.
Scam artist: A person who designs or operates a scam.
Scholarship: Financial aid for students who meet special athletic, academic, or artistic qualifications, or who plan to study certain subjects or who belong to certain groups. You don't have to repay a scholarship.
Securities: An investment document that a corporation, government, or other organization issues as proof of debt or equity. Stock or bond certificates are examples of securities.
Share: 1. A given amount of money you deposit with a credit union to become a member. A share entitles you to certain ownership rights (such as the right to vote for members of the board of directors), has a stated value, and pays dividends. 2. One unit of ownership in a corporation or mutual fund (same as stock).
Share account: The basic credit union savings account. You may usually withdraw money from your share account "on demand," that is, without giving your credit union advance notice and without paying a penalty. (Compare with share certificate account.)
Share certificate account: A credit union savings account that will earn dividends at a particular rate if held to maturity. If you withdraw any or all of the principal before maturity, you may have to pay a penalty of a percentage of the amount withdrawn.
Share draft: A credit union term for check, so called because it allows you to withdraw funds or pay bills from your credit union shares.
Share insurance: Protects members’ accounts in insured credit unions in the unlikely event of a credit union failure.
Shareholder: Someone who owns shares in a corporation or mutual fund. Shareholders earn dividends and typically have the right to vote for members of the board of directors and on other company matters; also known as "stockholder." You can be a customer of a bank without having a shareholder's ownership rights; in contrast, credit union membership automatically gives you ownership rights such as the right to vote for members of the credit union's board of directors.
Short sale: A sale of real estate in which the proceeds from selling the property will fall short of the balance of debts secured by liens against the property and the property owner cannot afford to repay the liens' full amounts, whereby the lienholders agree to release their liens on the real estate and accept less than the amount owed on the debt.
Small business: The definition of a small business varies by country. Small companies can be classified by Small Business Administration (SBA) programs such as loans and grants.
Small Cap: Stocks for companies with small market capitalization, usually between $300 million and $2 billion.
Small companies: The definition of a small business varies by country. Small companies can be classified by Small Business Administration (SBA) programs such as loans and grants.
Social Security: A program of the federal government that provides workers and their dependents with retirement, disability, and other payments. The money for Social Security payments comes from a tax, usually labeled "FICA" on your paycheck, that employees and employers pay equally. Learn more about what you'll get out of Social Security.
Social Security number: The nine-digit unique number that identifies each worker's record of earnings and benefits under the Social Security system.
Speculator: A person who gambles on high-risk investments, hoping to make a large profit quickly.
Statement: 1. The periodic report of your use of your accounts at a financial institution. 2. A written record of financial information, such as money owed.
Stock: A document that shows equity in a corporation. Stock represents each shareholder's claim on a part of the company's assets and profits.
Stock exchange: An organization that operates a marketplace for the buying and selling of stock . Examples in the U.S. include the New York Stock Exchange and NASDAQ.
Stockholder: Someone who owns stock in a corporation or mutual fund. Stockholders earn dividends and typically have the right to vote for members of the board of directors and on other company matters; also known as shareholder. You can be a customer of a bank without having a stockholder's ownership rights; in contrast, credit union membership automatically makes you an owner.
Stock market: The system for buying and selling units of ownership (called shares or stock) in a corporation or mutual fund.
Stop payment: To tell your financial institution not to honor a specific check you've written, usually because you're seriously unhappy with the product or service you bought. "Stopping payment" creates extra work, so you'll be charged a fee for the service.
Stored value card: See Prepaid card.
Student loan: A means of borrowing money for education. Ask your lender for details.
Supply and demand: The economic principle that asserts that the less common something is, or the more that people want it, the higher its price. The opposite is also true, according to this principle: The more common something is, or the less that people want it, the lower its price.
Synergy: The effect of a combination of separate actions or operations that make the whole greater than the sum of its parts. When one business buys another, synergy is often the goal—that the combined enterprise will perform better than the previously separate companies because it is more efficient.
Tax: A payment to federal, state, and/or local governments based on the sales price of a product, on worker income, or on other property and activities.
Thrift: 1. The wise use of money, especially avoiding unnecessary spending. 2. A financial institution that accepts savings deposits but is not a bank; this includes credit unions, savings and loan associations, and mutual savings banks.
U.S. Treasury Bill (T-bill): A short-term investment, which matures in one year or less, in the U.S. government. A buyer lends the government money by purchasing a Treasury Bill. The bill has a 'face value,' which tells the investor how much the bill will be worth when it matures. The buyer pays less than face value, then holds the investment while he earns interest on it. The U.S. Treasury department issues Treasury Bills, Treasury Notes, and Treasury Bonds to raise the money for federal government operations and to pay off other debts.
U.S. Treasury Bond: A long-term investment, matures in more than 10 years, in the U.S. government. See also Treasury Bill.
U.S. Treasury Note: An intermediate-term investment, which matures between one and 10 years, in the U.S. government. See also Treasury Bill.
Truth in Lending Act (TIL): A law the Federal Reserve enacted, designed to protect consumers when they work with lenders and creditors.
Trust: Property (including money, real estate, etc.) set aside by the owner and held by a trustee (the person overseeing the account) to be given to another individual at a certain date in time.
Trust fund: Funds set aside for another person's or organization's benefit. An individual known as a "trustee" invests the funds and manages the fund account until the beneficiary is eligible to take control of them, under conditions specified in the trust agreement.
Unemployment insurance: Compensation plans by which federal and state governments provide money to workers who've lost their jobs through no fault of their own. The federal Social Security Act of 1935 set up this system. Employers pay federal and state taxes to support unemployment systems. The amount employers pay depends on their wages, the amount they've contributed to the fund, and the amount their former employees have drawn from it.
Usurer: Someone who lends people money and charges them an extremely high interest rate on the loan. Usurious rates on short-term loans are not always easy to see. For example, a two-week payday loan for $100 might cost $15. That sounds like an interest rate of 15%, which is similar to credit card rates. However, a credit card rate is an annual rate. To compare the two loan options fairly, you need to recalculate the payday loan rate for a full year. In this example, the true annual rate for the payday loan turns out to be about 390% (0.15 x 26 two- week periods)!
W-2 form: A tax form that you get from your employer that reports your wages earned for the year, state and federal taxes withheld (see withholding), and Social Security information. You include a copy of the W-2 form when you file your state and federal tax returns.
W-4 form: A tax form that you get from your employer and fill out to help your employer determine the amount of taxes to withhold from your paycheck (see withholding).
Wage: Payment for work, sometimes used to refer to payment based on hours worked instead of duties performed. (Compare with salary.)
Wealth: Property that is valuable because it could be sold or used to generate income.
Wholesale: The sale of goods in quantity to a distributor who in turn sells to retail stores and institutions, instead of individual consumers.
Withdraw: To take money out of your account at a financial institution.
Withholding: The part of your earnings that your employer sends directly to the federal, state, or local government as partial payment of your expected tax for the year.
Work permit: A government form that records basic information about a worker who is a minor (generally this means under the age of 18) and an employer. The purpose of a work permit is to ensure that teenage employees are protected by federal and state child labor laws. The first person to talk to about a work permit is your school guidance counselor.
Work study: A financial aid program in which the federal government subsidizes certain part-time jobs for needful students.