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Wading through the dry and oftentimes complicated terms and conditions associated with a new banking product is enough to give most customers a big headache.
It also doesn’t help that “there are so many different variations on what banks call things,” Odysseas Papadimitriou, CEO of CardHub.com, says.
This is because many laws don’t require standardized terminology regarding certain banking products. Additionally, not all financial institutions are governed by the same regulatory bodies, says Stephanie Wei, vice president of deposit products at NerdWallet.
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State-chartered member banks, bank holding companies, foreign branches of U.S banks fall under the jurisdiction of the Federal Reserve. National banks are typically overseen by the by the Office of the Comptroller of the Currency (OCC) and most credit unions are governed by National Credit Union Administration (NCUA). As such, “if you get really technical, you’ll start to see some differences in language,” Wei says.
To alleviate some of the confusion, MainStreet breaks down some of the common terms you’re likely to find in the fine print of your banking contracts.
1. Overdraft Protection
Overdraft protection is essentially an agreement you enter into with your bank that permits them to cover transactions when your account is overdrawn. Legislation passed back in 2010 requires banks allow customers to opt into the service, largely due to the fees associated with it. Most banks charge between $30-$35 per overdraft.
Regardless of the implication the word ‘protection’ implies, “generally, we don’t recommend this,” Wei says. “It’s better to just get declined and there are cheaper ways to get notified [your account balances are low].”
Keep in mind, you can still be hit with an overdraft fee even if you’ve opted out the service. The legislation passed regarding overdraft protection only pertains to ATM and one-time debit card transactions. It doesn’t apply to recurring debit card charges or what would have otherwise been a bounced check.
2. Overdraft Transfer Fee
The nuances in overdraft legislation–and the high revenue stream the service has provided to bank in the past – have led many financial institutions to offer different variations of the coverage. For instance, most banks will let customers who opt out of traditional overdraft protection link their savings account, a credit card or line of credit to their checking account, which will be used to cover overdrafts. In these instances, a transfer fee, typically around $12, is incurred. The fee will will then appear on either your credit or debit card’s billing statement.
Papadimitriou advises customers to ask specifically how the fee will be described to avoid incidents “where you have no clue you’re paying down an overdraft.”
3. Insufficient Funds or NSF Fee
At the opposite side of the overdraft spectrum is the insufficient funds fee, which can be incurred when a bank returns a check or declines a debit card transaction because a customer doesn’t have enough money in their checking account. Bank of America, which eliminated overdraft at the point of sale in 2010, may charge a $35 returned item fee when checks are bounced, depending on overdraft settings on a customer’s account.
All the nuances and caveats mean “you need to talk to them in advance,” Wei says, so you understand when you will and won’t be charged and how you can avoid all fees associated with a bank’s existing overdraft policy.
4. Deposit Item Returned
According to Wei, there is also a chance you can be hit with a fee when someone else bounces a check that you’ve deposited into your checking account. Deposit item returned or returned item fees are typically incurred when funds are made available even though the check has yet to clear the bank from which it is being withdrawn.
If the money is ultimately deemed unavailable either due to insufficient funds or perhaps an unclear signature, your bank may debit your account for the amount that was initially cleared, plus a fee, Wei says.
5. Annual Percent Yield (APY)
Conversation concerning savings account typically center on interest rates, but, truth be told, it’s the annual percent yield that customers need to focus on. The annual percent yield or APY is the interest figured on an annual basis that includes compounding interest (essentially the interest a customer is going to earn on interest as it is accrued.)
Since it accounts for compounding interest, the APY will give the customer a more accurate idea of how much money they can earn each year on the savings tucked away in the account. However, there are other reasons why financial institutions don’t simply refer to this as an interest rate or an APR.
“[The banks] want to differentiate that you’re getting paid versus you’re paying them,” Papadimitrou says.
6. Minimum Balance Requirement
This term is pretty straightforward. It refers to the amount of money required to open and maintain your bank account and avoid certain service fees. However, how to abide by these pre-set minimums can be a bit harder to follow since it varies from financial institution to financial institution.
“In most cases, they use the average balance of the billing cycle,” Papadimitriou says, but banks could also simply go by what is in the account at the beginning or end of the month.
To make sure you don’t get dinged, it’s important to verify what your bank's particular policy is. You also may want to ask how they measure a billing cycle since some institutions may not close and open theirs alongside the calendar month.
Decode four more banking terms (premium checking? deposit advance loan?) at MainStreet!