Many people only have bank accounts but don't really understand how the banking system works. If you are like that, here are some terms you have to familiarize yourself with.
Banking is full of terms and concepts that can be difficult to comprehend. Even common ones have features that may not be obvious. But with banking and finance becoming such an important part of our daily lives, taking the time to learn some new phrases — or understand old ones better — could yield profitable results.
According to www.nerdwallet.com and www.m.rediff.com, here are the top 22 essential banking terms every consumer should know.
Understanding these seemingly difficult terms will help you navigate the complex world of personal banking with ease.
Also, with the Central Bank of Nigeria’s cashless banking drive fast gaining traction, it is important to know certain banking terms better.
1. National Electronic Funds Transfer
Transfer of funds initiated by electronic means such as an electronic terminal, Internet or ATM. The NEFT facilitates the process of fund transfer within the same bank or inter-bank transfers. The minimum amount that can be transferred varies from one platform to another. For example, via ATM, the highest is N200,000. On Internet, it differs from one bank to another. It also depends on whether you are transferring from a current account or savings account. But you may do as much as N1m and N5m.
2. Linked account
Any account linked to another account in the same bank where funds can be transferred electronically between accounts and carry out other specified services as well.
3. Base rate
It is the minimum rate a bank charges its most credit-worthy customer. The bank cannot lend below this rate (with an exception to bank employees, loans to bank depositors against their own deposits, etc)
For a retail customer, the base rate will cover all loans from auto, personal to home loans effective.
4. Balance transfer
Balance transfer is an option included under credit card payments and is useful for persons holding more than one card. On availing this facility, the cardholder can transfer the balance amount outstanding on card one to card two and vice versa, if he/she is not able to make full payment that is due on a particular card.
In any case, the payment due date is only delayed but the payment has to be made at the scheduled time as stated in card two. Balance transfer facility is useful in reducing the interest outgo (on card one) and extending the payment due date on the original card.
5. Cashback
The term ‘cashback’ is used with reference to credit cards. Cashback means giving back some portion of money (spent by the cardholder through the credit card) to the cardholder himself. The cashback is made in terms of points earned.
6. Credit history
Credit history is an account of an individual’s past borrowings by way of loans, credit cards and all other debt that needs to be repaid/has been repaid. Credit history in Nigeria is provided by credit bureau. The CBN has licensed three credit bureaus in Nigeria to provide this service to banks and other bodies.
7. Collateral
A borrower needs to provide some kind of security to the bank in case of high-ticket loans (except home loans where the property is the security). Such security is called collateral.
In case the borrower fails to repay the loan, the bank has the authority to attach the collateral to the loan and claim its dues.
8. Documentation fee
Bank requires certain documents from the borrower to look into his creditworthiness and charges a fee for the same. These charges are known as documentation charges.
9. Dormant/inactive account
If an individual has not made any transactions in his/her account (except for interest payments credited by the bank) for more than six months, the savings/current account is declared as dormant/inactive.
10. Fixed rate
Fixed rate is the interest rate that remains constant for the full term of the loan.
11. Floating rate
This is an interest rate that is referenced to a market rate and is revised as per the change in the interest rates in the economy. When interest rates in the economy rise, floating rates rise and vice versa.
12. MICR code
MICR stands for Magnetic Ink Character Recognition. MICR Code comprises nine digits given at the bottom (right side) of the cheque number. It is a unique code and varies between each bank branch. MICR code is required for cheque clearance.
13. No-frills account
This account is a basic savings account provided by banks to make banking simpler and more accessible for all customers. In a no-frills account, you do not have to maintain minimum balance and enjoy basic banking facilities such as electronic funds transfer, net banking, free cheque book issuance.
14. Electronic clearing service
It is a service provided by the banks to facilitate direct debit from your bank account towards an investment account (such as a mutual fund) and/or paying a regular loan.
One can give a standing instruction to the bank to transfer the specified amount every month for a specified period. Alternatively, you can direct a one-time transfer of funds through NEFT.
15. Processing fee
Bank levies processing fee in order to process the loan application of the borrower. This fee is a small percentage (example: 2.5 per cent) of the loan amount sanctioned and is usually waived off during festival time to attract more borrowers. Processing fee is charged by the bank upon sanctioning of loan to the borrower.
16. RTGS
The RTGS or Real Time Gross Settlement System facilitates fund transfer within same bank or inter-bank transfers, but unlike NEFT, RTGS ensures the fund transfer fast and smooth in ‘real-time’ for a nominal fee.
The minimum transfer amount is higher than NEFT.
17. KYC
KYC or Know Your Customer norms are imposed by the CBN on banks and other financial institutions to ensure that the correct identity of the bank customers is established and to ensure that banks deal only in legitimate banking operations and not in money laundering or frauds.
18. Routing number
It is number that identifies your financial institution. Larger banks may have multiple routing numbers that are based on the geographic location where the account was opened.
19. APR
Annual percentage rate is the amount of interest you gain from keeping money in an account in a year, not including compound interest. Annual percentage yield is the amount of interest you gain from keeping money in an account in a year, including compound interest.
20. Compound interest
Interest that applies to the original deposit as well as any newly earned interest. For example, if you put N10,000 in an account that earns compound interest at five per cent a year, in the next year you will earn five per cent on N10,500. Non-compounding interest would continue to earn five per cent on N10,000.
21. Returned item fee
A bounced-cheque fee charged to the person trying to deposit the cheque. It can be charged if there are insufficient funds in the cheque writer’s account or if the account is closed.
22. Overdraft fee
A fee incurred when your current account doesn’t have enough funds to cover a payment that is requested. The financial institution will pay what your account lacks, after which your account may have a negative balance.
