Most people have a bank account, but few understand the terminology banks use — and this can have a direct impact on your pocket.
Paul Maggott, spokesperson for ICE, Old Mutual Bank’s young, urban market offering, says many commonly used banking terms are misunderstood, or not understood at all.
‘Assuming that you know what a beneficiary is, or the difference between a stop and debit order, can be just as bad as not knowing at all. Yet, incredibly, people sign forms and make financial decisions without understanding the terminology,” says Maggott.
‘There’s too much jargon in the banking business, so ask if you don’t understand something. Don’t be embarrassed or think you’ll look stupid. It’s far more stupid to make a financial decision based on an assumption,” he adds.
Here are Maggott’s 10 most frequently used terms.
Prime rate
The interest rate at which banks lend money to creditworthy customers. As a general rule, the higher the risk the more banks will charge above prime, so low-risk customers will be charged less above prime. It’s one of the reasons why it is worth maintaining a good credit record. The prime rate is currently 12,5%.
Debit order
An arrangement whereby you give a company permission to regularly debit your account, for example to pay a cellphone contract. The amount may vary each month and the debit order lasts as long as there is a contract between you and the company debiting your account. Debit orders can only be used if the service provider is authorised by the bank to use the debit order system.
Stop order
A stop order is an arrangement between you and the bank to pay a person or company a fixed amount every month, for example, rent payments to a landlord. These cost more than debit orders because the bank has more administration work.
Third-party payment
Technically stop and debit orders are both ways to make third-party payments, but nowadays the term is mainly used to describe making payments via the internet. The person or company you are paying is called the beneficiary. Most online banking sites allow you to load one-off or regular beneficiaries yourself. Paying beneficiaries online is more cost effective than using a stop or debit order and gives you more control over your finances.
Bounced cheque
This happens when there isn’t enough money in the account to cover the amount of the cheque and the bank refers it to the drawer, or ‘bounces” it back to you. Besides being charged a penalty, this can also reflect on your financial track record.
Cancelled cheque
This is a ‘used” cheque that has been paid and the money debited or subtracted from your account. These are usually posted back to you with your statements and are worth keeping as receipts.
Cleared cheque
A cheque clears when the amount is debited from your account and credited or added to the account of the person or company you are paying.
Collateral
What the bank accepts as security against a loan. If you fail to repay the loan, the bank can keep the collateral. Collateral is usually a house or piece of land you own.
Compound interest
Interest that is calculated not only on the original amount but also on the interest that has already been earned. Compound interest can be frightening if you owe money, as you’re being charged interest not just on the debt, but on the interest you owe too. If you’re saving, however, it can be a tremendously powerful tool as you earn interest on your savings and all the interest you’ve earned.
Bank assurance
Banks are increasingly providing more than just traditional banking products. Many now offer assurance products, such as life cover and retirement products. This means you can access banking and other financial services products under one roof.