20 Essential Banking Terms Every Account Holder Should Know
Banking is an integral part of our daily lives, yet its terminology can often seem like an obscure language. To help you navigate the financial landscape more effectively, here are 20 common banking terms demystified, along with examples that are particularly beneficial for an average person account holder in India.
A savings account is a basic type of bank account that allows you to deposit money, earn interest, and withdraw funds.
A current account is primarily used for business transactions. It enables unlimited deposits and withdrawals, making it ideal for frequent transactions and payments.
A fixed deposit is an investment option where you deposit a lump sum for a fixed period at a predetermined interest rate. For example, investing ₹50,000 for 1 year at a 6% interest rate will yield ₹53,000 at maturity.
A recurring deposit allows you to save regularly by depositing a fixed sum every month. This helps achieve specific financial goals, such as saving for a vacation or wedding.
A credit score is a numerical representation of an individual's creditworthiness, which is based on their credit history. A higher credit score can lead to better loan terms and interest rates. For instance, a credit score of 750 or above is considered good in India and increases your chances of getting loans at favorable interest rates.
A credit card is a payment card that allows you to borrow money to make purchases, with the promise of repayment at a later date. It offers a convenient way to manage expenses and build a good credit history.
A debit card is linked to your bank account and allows you to make transactions using the funds available in your account. It provides a convenient and secure way to pay for goods and services.
Net banking, or Internet banking, enables you to perform various banking activities online, including fund transfers, bill payments, and account management, without visiting a physical branch.
NEFT is a nationwide payment system that facilitates one-to-one funds transfer. It is suitable for transferring funds to accounts in different banks across India.
RTGS is a system that allows for real-time fund transfers. It is typically used for large-value transactions that require immediate clearing.
UPI is a real-time payment system that enables instant fund transfers between two bank accounts using a mobile platform. It simplifies transactions and is widely used for various purposes, including bill payments and online shopping.
ECS is an electronic mode of funds transfer from one bank account to another. It is commonly used for activities such as payment of bills, loan EMIs, and investment in SIPs (Systematic Investment Plans).
KYC is a process that helps financial institutions verify the identity and address of their clients. It is mandatory for opening and operating bank accounts, availing loans, and investing in financial products.
A fixed interest rate remains constant throughout the loan tenure, while a floating interest rate fluctuates based on market conditions. Understanding the difference helps in choosing the most suitable loan option.
Nomination is the process of appointing a person to receive the funds in your account or investments in the event of your demise. It ensures that your assets are transferred to your chosen nominee smoothly, avoiding legal complexities.
Overdraft is a credit facility provided by banks that allows an account holder to withdraw more money than they have in their account, up to a specified limit. For example, if you have 10,000 INR in your account and you withdraw 12,000 INR, the additional 2,000 INR will be considered an overdraft.
Auto-debit is a convenient feature that automatically deducts a predetermined amount from your bank account for regular payments, such as utility bills or loan EMIs. For instance, if you have a monthly gym membership, you can authorize the gym to deduct the membership fee directly from your bank account.
IFSC (Indian Financial System Code) is a unique 11-character code provided by the Reserve Bank of India to identify bank branches during electronic fund transactions like NEFT, RTGS, and IMPS. For instance, if you want to transfer funds to a beneficiary's account, you will need the IFSC code of their bank branch.
Cheque bounce occurs when a cheque cannot be processed because of insufficient funds in the issuer's account or other technical reasons. The bank returns the cheque to the payee's bank with a reason for non-payment. For instance, if you issue a cheque for 50,000 INR but have only 40,000 INR in your account.
The mini-statement is a condensed version of your bank account statement that provides a quick overview of recent transactions. It typically includes details such as the date, description, and amount of transactions.
Understanding these banking terms is crucial for managing your finances efficiently and making informed decisions. By being well-informed, individuals can utilize the various banking services efficiently and secure their financial well-being.
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