Making sense of money

The reality is though that if one hopes to open and use a bank account or deal in any way with a bank, its important to know these basic terms because they can directly affect your wallet.

Paul Maggott, spokesperson for ICE, Old Mutual Bank's young urban market offering, says many commonly used banking terms are misunderstood or not understood at all.

He says: "Assuming that you know what a beneficiary is or the difference between a stop and debit order can be just as bad as now knowing at all.

"Yet incredibly people sign forms and make financial decisions without understanding the terminology."

Here is his top 10 list.

• Prime rate: The interest rate at which banks lend money to creditworthy customers.

  As a general 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%.

• Debit order: An arrangement whereby 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 both 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 the 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 fail to repay the loan then 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 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.

  Bancassurance: 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.

  Maggott says: "There's too much jargon in the banking business, so ask if you don't understand something. Don't be embarrassed or think you'll look stupid.

  "It's far more stupid to make a financial decision based on an assumption."

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