More than 75% of Spaniards acknowledge that they need to improve their financial literacy. This data corroborates the theory of the PISA report, which places Spain below the average of European countries in terms of the population’s financial knowledge.
Do you feel lost when people use banking terms ? Don’t worry, it’s perfectly normal. The financial world is full of strange nomenclature, but learning its meaning is not only easier than it seems, but it will also give you power over your finances. To try to make it a little easier, we’ve developed a glossary with examples of the main terms you should know to speak the same language as your bank, your financial advisor, or the financial section of your newspaper. Oh! And we’ve organized it by topic instead of alphabetically to make it easier for you to know the words you need for a specific financial area.
The most commonly used banking terms in bank accounts
To get off to a good start, let’s review the essential concepts of a bank account . These terms are the foundation of everyday personal finance, so everything from understanding your account number to knowing what the bank can charge you is key . Let’s go through them step by step.
Checking vs. Savings Account: What’s the Difference?
When you open your first account, the bank usually offers you either a checking or a savings account. Which one do you need? The main difference lies in how you use them:
- Checking account: This is your day-to-day account. You deposit your payroll into it and make everyday payments: card purchases, bills, transfers, etc. It usually allows unlimited transactions without penalty.
- Savings account: Just as its name suggests, it’s designed to store money. It generally gives you a small return on the balance you maintain, although it requires fewer daily transactions. Many don’t allow direct debits or frequent payments without penalty.
However, today the lines between the two have blurred. Some checking accounts can pay you interest, and many savings accounts allow you to withdraw money without penalties.
The important thing is to check whether the account pays interest and whether it charges for usage . Remember that the money in both is protected by the Deposit Guarantee Fund up to €100,000 per account holder and bank. So, in the event of the bank going bankrupt, you would recover up to that amount.
The IBAN and the BIC or SWIFT, your account numbers
Whether it’s a checking or savings account, when you open your account in Spain, you’ll receive a code called an IBAN . It stands for International Bank Account Number, and it’s basically the unique identifier for your bank account internationally, much like your ID card.
In Spain, the IBAN has 24 characters, including the country code (ES for Spain), two check digits, your bank code, your branch code, and your account number. In case you’re wondering, yes, it’s very similar to the old account number, but adapted to European directives.
What is the IBAN used for?
It’s used so other people can send and receive money to your account from anywhere in Europe , enable payments or direct debits, etc. Just by knowing your IBAN, anyone can make a transfer to you within the SEPA zone (the European countries that support euro payments). That’s why you’ll see it on your bank statements or in the bank app: it’s the information you need to provide to receive money or set up direct debits.
Is there another code?
Yes, sometimes they ask for your BIC or SWIFT code. This code identifies the bank , not your account, in international transactions. Do you need to memorize it? Not really for Europe, since within SEPA, the IBAN is usually sufficient, and transfers are automatic.
This code is especially useful if you’re receiving money from outside the eurozone, for example, if you’re receiving a transfer from a US bank.
Balance, transactions, credits and debits: understanding transactions
When you check your account, you’ll see a list of transactions . Each transaction is typically a debit or credit . These accounting terms refer to the inflow or outflow of money:
- Credit: This is a sum of money that goes into your account. For example, a transfer from a friend or a deposit from your paycheck.
- Charge: This is a payment or withdrawal from your account. For example, a cell phone bill, mortgage payment, or any card purchase.
Your balance is the money available in your account after adding all credits and subtracting all debits. There can be different types of balances (book balance, available balance, or hold balance), but first, consider the current balance you have in your account .
An important concept is being in the red or overdrawn. This occurs when your balance becomes negative—that is, you’ve made more payments than you’ve earned, and you owe the bank money on that account.
For example, if you had €50 and receive a bill for €70, your balance will drop to -€20, meaning you’re overdrawn. Banks may allow certain overdrafts, up to a certain limit, but they will charge you for it .
You may be charged interest and overdraft fees for advancing that money to cover the payment. It’s always best to avoid going into the red. If you see that you’ll be short on funds for a payment, it’s best to speak to your bank first.
Direct deposit of payroll and bills: convenient automatic payments
One of banking’s greatest allies to make your life easier is direct debit . Direct debit means authorizing automatic payments to your account . There are two very common direct debit methods:
- Direct deposit: This means your company automatically deposits your salary into your account each month. You provide your IBAN to the payroll department, and they arrange for the regular payment. Many accounts offer advantages if you do this, because for the bank, having your salary guarantees that you’ll use the account.
- Direct debit payments: water, electricity, internet, mobile… You can direct debit these payments so the bank automatically makes them for you to the bill issuer.
How does it work? You sign a direct debit order authorizing a company, such as the electric company, to charge your bills to your account. From then on, each time the due date arrives, the amount is charged to your account without you having to do anything else.
Direct debit makes your life easier , but it requires that you have a sufficient balance in your account when the charge arrives. If you don’t have enough money one month, the bill might not be paid, which is known as a chargeback , and the company will demand it from you. The bank might even charge you money for each returned bill.
If you’ve been charged an unusual amount, there’s good news: in the SEPA zone, you have the right to return an already paid bill if, for example, you disagree with the charge. You can do so within up to eight weeks for authorized bills. Simply notify your bank to reverse the undue charge .
Common bank fees: learning to detect them
Now let’s talk about a less pleasant but extremely important topic: bank fees . A fee is basically a rate or charge that the bank charges you for providing a service. As a customer, you should be aware of the most common fees to avoid or minimize them whenever possible . Here are the main ones:
- Maintenance fee: This is the fee for keeping your account open and operational. Many traditional banks charge a monthly or quarterly fee simply for maintaining the account. Can it be avoided? Often, it is: banks usually waive it if you meet conditions, such as direct depositing your payroll, bills, or having cards with them. Do your research, because this maintenance fee can be €30, €60, or more per year if you don’t meet the requirements.
- Transfer fees: Although many transfers are free in the digital age, some banks charge for sending money to another bank. For example, you might be charged €1 per transfer if you make a bank transfer or in a foreign currency. Until recently, fees for instant transfers were also common, although due to recent changes in transfers , these costs have disappeared.
- Currency exchange fee: If you travel outside the eurozone and use your card to pay or withdraw money, your bank may charge you a percentage of the amount for currency exchange. This also applies if you make online purchases in foreign currency.
- Overdraft fee: Be very careful about having a negative balance. Banks can charge very high interest rates and sometimes a fixed fee. For example, if you’re down to -€100, they may charge you 5-10% annually on those €100 while you owe them, plus a fixed fee of €20-40 for «claiming outstanding balances,» which is basically the process of notifying you and managing the collection.
- Cancellation fee: Be careful, some accounts charge a fee to close the account and leave the bank. It’s not common, but it does exist. Mortgages also sometimes have an early cancellation fee . Whether it’s an account or another banking product, ask before signing what happens if you cancel it.
Cards and payment methods: using your money when shopping
The most common way you use your bank on a daily basis is probably through cards and electronic payments . In this section, we’ll review key terms such as card types, the difference between transfers and wire transfers, and other modern payment concepts.
Debit Card vs. Credit Card: Key Differences
You carry both in your wallet and use them to pay, but they don’t work the same way . Let’s keep it simple:
- Debit card: This is linked directly to your account and uses the money you have in it. Every time you pay with a debit card or withdraw money from an ATM, the amount is immediately deducted from your balance. If you don’t have enough, the transaction will be declined. This means that with a debit card, you can’t spend more than you have.
- Credit card: This card doesn’t use the money in your account right away. Instead, the bank lends you money for your purchases up to a certain limit. You pay with the credit card today, but the charge isn’t deducted from your account later, usually at the end of the month or early next month. This means you can pay even if you don’t have a balance at that moment , as long as you deposit money before the payment due date. For example, if you have €40 in your account but need to buy something for €50 with your credit card, the purchase will go through without a problem. You’ll owe the bank that amount, and at the end of the month, when you receive your paycheck, the bank will charge you that €50.
Financial tip:
If you use a credit card, try setting it up with a full payment due at the end of the month. This way, you’ll benefit from its convenience without going into debt for more than 30 days . Use it wisely: it’s not a gift, it’s borrowed money that you’ll have to repay. Useful for unexpected expenses or to concentrate expenses, but very dangerous if you use it to live beyond your means.
Loans and credits: understanding bank financing
At some point, you may need to borrow money from the bank : whether it’s a personal loan for a car, a loan for an unexpected event, or the classic, a mortgage to buy a home. We’re entering the realm of loans, credit, and interest . These are crucial terms, and a misunderstanding here can cost you a lot of money. Let’s break them down and analyze what each means.
Loan vs. credit: Are they the same thing?
While we might say «I’ve been given a loan» or «I’ve asked for a loan» interchangeably on the street, in banking they’re not exactly the same . The main difference is how and when you receive the money and how you repay it:
- Loan : The bank or other institution gives you the entire amount requested at once, and you agree to repay that money plus interest within a set period.
For example, if you take out a €10,000 loan, Cofidis or another institution will pay you the €10,000 now, and you’ll repay, say, €200 a month for a few years until it’s paid off. This is used for specific, large purchases like a car, renovations, or school, and shouldn’t be used for travel or other indulgences (if you have any doubts, we recommend checking out when and when not to take out a loan ). Each installment you pay is made up of part interest and part of the total amount you owe.
- Credit: In this case, you are granted a maximum amount of money that you can use, but unlike a loan, you don’t receive it all at once. Instead, you gradually take what you need and only pay interest on the portion you have actually used, without having to spend (or repay) all the money requested.
Typically, credits are revolving: as you repay, new capacity is released for reuse. They’re used to access liquidity in case of need, rather than for a closed purchase. A business, for example, may have a line of credit to draw on for purchases if it has lower income one month.
Your solvency and credit rating
Before giving you money, the bank will want to know how good a “payer” you are : basically, the bank will evaluate your financial situation to determine if you are reliable to repay the loan .
This is known as bank scoring . Banks consult bad debt files, in case you’ve missed a payment in the past, the CIRBE (Bank of Spain’s Risk Information Center), which lists your current bank debts above a certain amount, and use their own internal scores. If everything looks good, they’ll say yes to the loan . If they see too much risk, they may deny it or give you less money.
I love you Andrés for interest: interest, TIN and APR
To put it simply, the interest rate is the price of money . That is, what the bank charges you for lending a certain amount of money, or conversely, what it pays you for a deposit. It’s expressed as a percentage; for example, a loan at 5% annual interest means that each year you’ll pay 5% of the outstanding principal (i.e., what you owe) in interest.
Now, in loan and deposit information, you’ll typically see two acronyms: TIN and APR . What exactly are they?
- Nominal Interest Rate (NIR): This is simply the «pure» interest the bank charges for lending, without considering anything else. For example, 5% nominal annual interest.
- APR (Annual Percentage Rate): This is the total actual interest you’ll pay in a year, including not only the nominal interest but also fees and other associated costs. In other words, the APR better reflects the full effective cost.
Financial tip:
Always look at the APR when comparing loan or investment offers, as it’s the most realistic figure. In fact, the Bank of Spain emphasizes that the APR is only the base price, while the APR includes associated fees and charges and allows you to better compare different offers. For example, a loan may have an APR of 5%, but if you’re charged an origination fee, insurance, or other charges, the actual annual cost may be 5.5% or 6%.
Repaying Loans: Installments, Terms, and Amortization
When you’re approved for a loan, you agree to a term and, typically, a monthly payment . Let’s look at the related banking terms:
- Installment: This is the amount of money you’ll repay in each payment. Typically, you’ll pay the same amount each month, but the composition of that installment often changes over time. At first, since you still owe almost all the money, most of the installment is interest, with a small portion being amortization (repayment of principal). Over time, you’ll begin to repay more and more principal and less and less interest in your installments.
- Term: This is the agreed-upon period for repaying the total. It can be short, repaying it in 12 years, or very long, up to 30 years or more.
Financial tip:
The longer the term, the smaller the installments, but you’ll pay more total interest. The shorter the term, the higher the installments, but you’ll pay off sooner and pay less interest overall. Finding the right balance is key, depending on your payment capacity.
Another banking term you should know is early repayment: If you ever have extra money, you can prepay part or all of your debt before the due date. Just check if your bank charges an early repayment fee , for example, 0.5% or 1% of what you pay early. Even so, paying off your debt early saves you future interest because it reduces your outstanding debt sooner than expected.
Banking terms on savings and investment products
It’s not all about saving or lending money; you can also save or invest . The idea is to help you understand basic banking terms so you can develop on your own.
To do this, we won’t go into anything complex, just the basics that are good to know : deposits, interest-bearing accounts, investment funds… And, very importantly, know what is protected by the bank and what isn’t, so you don’t get any surprises.
Interest-bearing accounts and fixed-term deposits
Let’s start with the simplest and least risky options. If you’re looking for ways to grow your savings without too much hassle, these two options are ideal for you:
- Interest-bearing account: This is a bank account that pays you interest on your balance . It works almost like a checking account, but with the added benefit of giving you interest based on your balance. It’s not usually high, but at least it’s a sure thing.
- Fixed-term deposit: in this case, it is a product in which you deposit an amount of money for an agreed period (6 months, 1 year, 2 years, etc.) and in exchange, the bank pays you a higher interest than a normal account, although you cannot touch the money until the term expires.
For example, if you put €5,000 into a 12-month deposit at 2% APR, you won’t be able to access that money that year, but at the end of the year the bank will return your €5,000 + €100 in interest (2% of €5,000).
Understanding Simple Interest vs. Compound Interest
Although it sounds like a simple math concept, understanding compound interest will help you plan your savings better. To simplify the difference:
- Simple interest: Interest is only calculated on the initial capital. With this approach, €1,000 at 5% annual interest for 3 years would give you €50 each year, for a total of €150 in interest. This would amount to €1,150.
- Compound interest: Consider that the interest generated is added to the principal and also generates interest. That is, «interest on interest.» If we included compound interest in the previous example: €1,000 at 5%, after 3 years, it’s not €150, but more:
The first year, €50. But the second year, you’ll generate interest on €1,050 (the initial amount plus the €50 earned). You’d end up with approximately €1,157. The difference seems small in three years, but the long-term impact is enormous. In 25 years, you could generate more than €2,000 in interest.
Financial tip:
A very common example of compound interest is reinvesting dividends : you let the returns be reinvested and your base grows over time. The famous phrase «compound interest is the most powerful force in the universe» highlights that, given enough time, this snowball effect can work wonders for your savings.
Investment funds: investing in a diversified way
Beyond traditional bank savings , your bank will likely offer investment funds if you’re looking for a higher return on your money in the medium to long term. An investment fund is a vehicle where many investors pool their money to collectively invest in specific assets.
In other words, instead of buying individual shares, you give the money to a fund, and it invests it according to its policy —for example, a European fixed-income fund or a global equity fund. Let’s review some of the related banking terms:
- Shares: When you invest in a fund, you buy «parts» of it. The value of each share rises or falls each day based on the fund’s investment performance.
- Yield: refers to the amount of money you earn on your investment. If your shares increase in value, your return increases. If they fall below the purchase price, you have a negative return. Unlike deposits, it’s not a secure guarantee, but you can earn a higher return.
- Fund fees: The fund may charge you management or deposit fees. To avoid surprises, the bank must provide you with the Key Investor Information Document (KIID), which details these fees and the risks.
