An understanding of common banking terms gives you better control of your wallet, says Paul Maggott of Old Mutual.
"Thinking you know what a beneficiary is or the difference between a stop order and a 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."
He has provided an explanation for the following list of terms:
Prime rate: The interest rate at which banks lend money to credit-worthy customers. As a rule, the higher the risk, the more banks will charge above prime, and vice versa. It's one of the reasons why it's worth maintaining a good credit record. The prime rate is currently 12,5 percent.
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Debit order: An arrangement by which 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, both stop and debit orders are 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 beneficiaries yourself, either as a once-off or regular payment. 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 do not repay the loan, the bank can keep the collateral. Usually, collateral is a house or piece of land you own.
Compound interest: Interest that is calculated not just 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 also on the interest you owe. If you're saving, 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 and many now also offer assurance products such as life cover and retirement products. This means you can access both banking and other financial services products under one roof.
- This article was originally published on page 1 of Cape Argus on April 23, 2007
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