Let’s Get Literate: Commonly Misused Financial Terms and Phrases

As a credit union, we’re used to debunking myths and misconceptions. When it comes to financial language, we know that many terms and phrases are often misused.

So, for Financial Literacy Month, what better way to help boost our members’ money savvy than to debunk a few money-related myths? Here is our list of [clarified!] terms and phrases to launch you into financial fluency.

Credit Score

A credit score is a number that predicts how likely someone is to pay back a loan on time. It’s based on factors such as length of credit history, payment history, and credit usage. A higher credit score indicates that someone is a “lower risk” and more likely to pay back a loan on time. The ability to get a loan and the interest rate of a loan are often influenced by credit scores.

While we often refer to a person's credit score as a single number, each person actually has a number of scores based on reports from the three consumer credit bureaus. While scores tend to vary, the general level of the scores should be consistent.

Dividends

A portion of a company’s profits which are distributed to the company’s shareholders is called a dividend. If you own a share of a company’s stock that issues a dividend (not all do), you earn money as a stockholder of that company.

Investment

If you’re not sure whether it’s time for you to start investing, or if you should focus on saving, the answer depends on your goals, risk tolerance, and financial situation. Here is the difference between saving and investing:

Saving is putting money aside, typically into a bank account. Often, people save for a particular goal, such as making a large purchase (say, an engagement ring, a car, or a house) or to prepare for potential emergencies (such as car repairs or a medical event).

Investing is putting some of your money into assets that might increase in value, such as stocks, property, or shares in a mutual fund, with the aim of helping it grow.

Interest Rate

An interest rate is either the cost of borrowing money or the reward for saving it. It is calculated as a percentage of the amount borrowed or saved. When referring to debt, interest is the term for the cost of borrowing money. When you borrow money, you pay interest.

Stocks and Bonds

A stock is partial ownership in a corporation, while a bond is a loan from you to either a company or the government.

Stocks are value items that reflect that company’s performance. If the company is doing well and highly profitable, the value of its stocks will generally rise. Conversely, the more poorly a company’s performance, the more their stock values will likely decline.

Bonds, meanwhile, are often issued by various entities (such as the U.S. government, municipalities, or corporations) in order to raise money. By purchasing bonds in your investment accounts, you are essentially lending your money to these organizations in exchange for interest payments until the bond reaches maturity, at which point the principal is repaid to you.

Conclusion

Part of helping our members bank better to live better is equipping them with monetary knowledge. Financial support is our bread and butter, and we want to empower our members to live better by achieving their financial goals. This starts with becoming more fluent in financial terms.

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