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Understanding the basics of banking

Understanding some of the most commonly used banking terms could be helpful when it comes to making the most of your banking.

4 minute read

There are a lot of concepts to get your head around when it comes to banking. Here, we unlock a few of the most common ones.

Automatic payments vs direct debits

Automatic payments and direct debits are a way to pay others regularly without needing to create and confirm your payment each time. However, the way they’re set up and controlled is slightly different.

Automatic payments

An automatic payment is a regular payment to a person or a business which is set up and controlled by you. You decide the amount and how often you want to pay it. Automatic payments can also be set up between your accounts, like transferring money from your transaction account to your savings account on pay day. You can usually set up an automatic payment, change or cancel a payment, through online banking.

Direct debits

A direct debit is an agreement between you and a business, like your mobile phone provider or your gym, to pay your bills. It’s approved by you, but set up and managed by the business you’re paying - taking a lot of the effort away. 

A direct debit payment can change each time if the amount tends to vary. For instance, if you’re paying your power supplier, you may choose to pay the full bill each month – whatever that may be. This means your provider is able to deduct the exact amount owing from your account each time it’s due.

To stop a direct debit, it’s best to contact the relevant business directly. However, your bank must also cancel it if you ask them to. If you do end the payments through your bank, make sure you also let the business know in case they require you to pay another way.

Credit, debit, and Eftpos cards

Credit and debit cards both allow you to buy things instore and online. The main difference is, when you spend using a credit card, you’re borrowing money from the bank or card provider, and your card balance increases as you spend. Your balance will have a maximum limit, and you’ll pay interest if you don’t repay the total balance of your account each month. 

When spending with a debit card, on the other hand, you’re taking money out of your own account. It means you can only spend what’s in the account the card withdraws from and you won’t pay any interest on that amount, unless you go into overdraft. 

An Eftpos card only allows you to withdraw cash at an ATM or make in-store purchases by swiping your card throughout New Zealand. Unlike a credit card or debit card you can't shop online, add it to your digital wallet or make contactless payments.

Arranged vs unarranged overdrafts

Arranged overdraft

An arranged overdraft is an approved limit on your transaction account when your balance goes below zero. You’ll need to apply for an arranged overdraft, and if approved, your banker will work out an amount that’s affordable for you.

An arranged overdraft is designed as a safety net to assist with cashflow. You’ll usually be charged interest on the amount you overdraw your account by and possibly fees. If you don’t have a consistent, regular income, an overdraft could be a way to bridge the gap between paydays. You should only dip into your arranged overdraft when you need to, and try not to withdraw the full amount at once, as you're likely to pay more in interest, and might mean you struggle to get out of overdraft.

Unarranged overdraft

If you don’t have an arranged overdraft set up and your account balance falls below zero, this overdrawn amount is called an unarranged overdraft. You could go into unarranged overdraft if you have a payment set up to go out of your account, but not quite enough in the account to cover it. You could also find yourself in an unarranged overdraft situation if you exceed your arranged overdraft limit.

If you go into unarranged overdraft, your bank will likely charge you interest on the amount overdrawn, and an overdraft fee. You may be given a short window to return to a positive account balance before you’re charged the fee.

Savings accounts vs term deposits

Savings accounts

A basic savings account is probably what springs to mind when you think of saving through your bank. They're easy to open and pay credit interest on your balance. Savings accounts generally offer flexibility to access the money in your account when you need to, so are a good option when you think you might need to dip into the money from time to time. For this reason, interest rates for savings accounts can be lower than other investments. Each savings account will have different features and settings so its important to check how your chosen account works and weigh up the features and rate with your specific needs.

Term deposits

With a term deposit, on the other hand, you lock a set amount of money away for a fixed length of time – usually as little as seven days, or up to five years – with a fixed interest rate. The benefit of locking your money away is that you could earn interest at a higher rate than a savings account. Generally term deposits are more suitable for higher balances and have a minimum investment amount. 

However, locking your money away means that in most cases you are required to give your bank more than 30 days' notice if you need to access your money. You may also lose some or all of the interest earned if you withdraw your money early. There are usually exceptions, such as if you are suffering financial hardship

You can find out more about the difference between savings accounts and term deposits in our article Supercharge your savings.

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This article is solely for information purposes. It’s not financial or other professional advice. For help, please contact BNZ or your professional adviser. No party, including BNZ, is liable for direct or indirect loss or damage resulting from the content of this article.

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