Start hereA loan offer shows one rate, a savings account shows another, and the news talks about a third. Many come with letters such as APR or APY. Here is what ten common money words mean, as the official bodies that define them explain it.
Most money words are short labels for one simple idea. Below are 10 of them, each explained the way an official body defines it, such as a central bank or a consumer regulator, and each with the country that body belongs to.
The definitions differ a little from country to country. Where that matters, the card says so.
Prices and interest
Three words describe what money is worth over time and what it costs to borrow.
1. Inflation
Inflation means prices in general are rising, so the same money buys a little less.
The US Federal Reserve defines inflation as “the increase in the prices of goods and services over time”. It adds that inflation cannot be measured by a rise in the cost of one product or service, or even several. It is about the general level of prices.
In the UK, the Bank of England explains that the Office for National Statistics checks the prices of about 700 items in a “basket” of goods and services every month. Its own example: if CPI inflation is 2%, a basket that cost £100 a year ago would cost £102 today.
The Bank of England says a little bit of inflation is helpful. The UK government sets the Bank of England a target of 2% a year. The Fed’s policy committee says 2% a year, measured by a price index of household spending, is most consistent with its goals over the longer run.
For example, if bread gets dearer while phones get cheaper, the overall level could barely move. One price rising is not inflation on its own.
Watch for: the Bank of England’s plain point that when prices rise quickly, you can’t buy as much with your money.
2. Interest rate
An interest rate is the price of borrowing money, or the reward for saving it, shown as a percentage.
Investor.gov, the US Securities and Exchange Commission’s site for investors, calls interest “the price paid for borrowing money”. The Bank of England says that for a borrower, the rate is what you are charged, as a percentage of the loan. For a saver, it is how much is paid into your account, as a percentage of your savings.
Central banks also set a rate of their own. The Bank of England calls its Bank Rate the most important interest rate in the UK because it influences all other interest rates. In Australia, ASIC’s Moneysmart says the Reserve Bank sets a target cash rate, the rate on overnight loans between banks.
The Bank of England also explains the link to inflation: higher rates make borrowing dearer and saving more attractive, so people tend to spend less. When people spend less, prices tend to rise more slowly.
For example, the same rise in rates is a higher cost on a car loan and a higher reward in a savings account. One rate, two sides.
Watch for: the period a rate covers. Moneysmart notes that an interest rate is usually expressed as a percentage per year, so a monthly figure can look smaller than it is.
3. Fixed and variable rates
A fixed rate stays the same for an agreed time; a variable rate can go up or down.
Investor.gov says interest rates may be fixed, meaning the rate is set and will not change. Or they may be variable, also called floating, meaning the rate may move higher or lower over time. ASIC’s Moneysmart describes a fixed rate as one paid at a fixed rate over the term of a loan or investment.
For Australian home loans, Moneysmart says a fixed rate stays the same for a set period, usually between one and five years, and repayments won’t change during that time, even if market rates rise or fall. A variable rate can go up or down over time, and the lender decides whether to change it and by how much.
For example, two people borrow the same amount on the same day. If rates later rise, only the variable-rate payment changes while the fixed period lasts.
Watch for: how long “fixed” lasts. In Moneysmart’s description it is a set period, which can be shorter than the loan itself.
Borrowing
Two words shape what borrowing costs and who gets offered it.
4. APR (annual percentage rate)
APR is a yearly rate meant to show the cost of borrowing, and what it includes depends on the product and the country.
The US Consumer Financial Protection Bureau (CFPB) says credit card interest rates are typically stated as a yearly rate, called the annual percentage rate (APR). For a mortgage, it describes the APR as a broader measure than the interest rate, adding points, broker fees and other charges you pay to get the loan. For that reason, it says, a mortgage APR is usually higher than the interest rate.
Australia uses the same letters differently. There, Moneysmart defines the APR as the interest rate charged to the borrower, excluding fees such as account opening and account keeping fees. The figure that adds most fees and charges is called the comparison rate. So the same three letters can include fees in one place and leave them out in another.
Moneysmart also notes that one credit card can carry more than one APR: one for purchases, one for cash advances and one charged if you pay late. The CFPB adds that for adjustable-rate mortgages, the APR does not reflect the maximum interest rate of the loan.
For example, two loan offers with the same interest rate can show different APRs in the US if one charges more fees up front.
Watch for: which fees a quoted rate includes, and in Australia whether a figure is the APR or the comparison rate. The CFPB’s own tip is not to look at the APR alone when deciding which loan makes sense.
5. Credit score
A credit score is a number that predicts how likely you are to repay, built from your credit report.
The CFPB calls a credit score “a prediction of your credit behavior, such as how likely you are to pay a loan back on time, based on information from your credit reports”. A credit report, in its words, is a statement of your credit activity, such as your loan-paying history and the status of your credit accounts. Credit reporting companies, also known as credit bureaus, collect and store financial data about you that creditors send them.
The factors scoring models typically use, the CFPB says, include your bill-paying history, your current unpaid debt, and how much of your available credit you are using. It adds that you do not have just one credit score, because each depends on the scoring model, the data used and even the day it was calculated. Most credit scores, it says, range from 300 to 850.
Reports are used for more than loans. The CFPB says other businesses might use your credit reports to help decide insurance rates, whether to approve a rental application, or how much of a deposit you need to pay. In Australia, Moneysmart says there are two main credit reporting bodies, and you can ask both for a free copy of your credit report.
For example, renting a flat can involve a look at your report, not only a bank loan. A score is a prediction, not a grade on you as a person.
Watch for: which report or score someone is looking at. There is more than one.
Saving and investing
Five words help describe what savings earn, what you own and how spread out it is.
6. APY (annual percentage yield)
APY shows what a US savings account pays in a year once interest earned on interest is counted.
Under the US rule for savings and other deposit account disclosures (Regulation DD), the annual percentage yield is a rate reflecting the total interest paid on an account, based on the interest rate and how often interest compounds over a 365-day period. Under the same rule, the plain interest rate does not reflect compounding.
So when interest is added more often than once a year, the APY can come out a little higher than the interest rate. For example, two accounts with the same interest rate can show different APYs if one adds interest monthly and the other yearly. You can try it with our compound interest calculator by switching between monthly and yearly.
Watch for: a quirk of the same rule. On US savings disclosures, the plain interest rate may also be called the “annual percentage rate”. APR on a loan and APY on savings are different measures.
7. Net worth
Net worth is what you own minus what you owe.
ASIC’s Moneysmart defines net worth as the difference between the total value of everything you own (assets) and the total value of all your debts (liabilities). An asset is something you own, such as money, shares, a bank account, or a house, land or a car. A liability is a debt or money owed, such as a bank loan or credit card debt.
For example, someone with savings and a car, and a loan on that car, adds the first two and takes away what is left on the loan. Net worth can be below zero when debts are larger than what is owned.
Watch for: it is a snapshot. It changes when the value of what you own changes, even if you do nothing.
8. Liquidity
Liquidity is how quickly and easily something can be turned into cash.
Moneysmart defines liquidity as how easily an investment or financial product can be converted to cash. It describes shares in large listed companies that are regularly traded on the Australian Securities Exchange as liquid, and direct property as less liquid because buying and selling can bring difficulties and delays. Investor.gov adds that liquid investments can be sold readily, without paying a hefty fee, to get money when it is needed.
For example, money in an everyday bank account is very liquid; a house is not. Something can be valuable and still slow to turn into cash.
Watch for: penalties for taking money out early. Investor.gov says liquidity risk is sometimes the case with products that charge a penalty for early withdrawal, such as a certificate of deposit (CD).
9. Diversification
Diversification means spreading money across different investments so that one loss matters less.
Investor.gov sums it up as “Don’t put all your eggs in one basket”. It describes spreading money among various investments in the hope that if one loses money, the others will make up for those losses. ASIC’s Moneysmart describes it as spreading investments across different asset classes, or within one, to reduce risk.
Both bodies describe it as reducing risk, and Investor.gov uses the words “in the hope”. So it is not described as a promise against losses.
Investor.gov also notes that a fund won’t necessarily provide diversification, especially if it is narrowly focused, such as on one industry sector. For example, a fund holding only one kind of company is still one basket.
Watch for: owning several things that all depend on the same thing.
10. Expense ratio
An expense ratio is the yearly share of a fund’s assets used to pay its running costs.
Investor.gov defines it as the percentage of a fund’s average net assets used each year to pay the fund’s operating expenses. It says you’ll find this figure in the fund’s prospectus fee table.
Investor.gov also says a fund with high costs must perform better than a low-cost fund to generate the same returns. It adds that even small differences in fees can translate into large differences in returns over time.
For example, two funds holding similar things can still take different yearly cuts. A small yearly fee repeats every year, so its effect builds up.
Watch for: costs tied to buying, exchanging or selling fund shares, which Investor.gov describes apart from the regular operating expenses. Our compound interest calculator can show how a slightly lower yearly rate changes a long-run total.
Already explained on our site
These money words have their own pages, so here they get one line each.
- Compound interest: Investor.gov, the SEC’s site for investors, defines it as “interest paid on principal and on accumulated interest”. Try our compound interest calculator.
- Emergency fund: the CFPB defines it as “a cash reserve that’s specifically set aside for unplanned expenses or financial emergencies”. More in our 7 money habits page.
- Bull and bear markets: Investor.gov describes a bull market as a time when stock prices are rising and market sentiment is optimistic, and a bear market as a time when they are declining and sentiment is pessimistic. More in bull vs bear market.
- Recession: the US National Bureau of Economic Research describes a significant decline in economic activity that is spread across the economy and lasts more than a few months. More in market cycles explained.
Where to learn more
- Our summary of The Psychology of Money, for how people think about these words in practice.
- Our page on why the world uses the US dollar.
- Investor.gov’s glossary (US Securities and Exchange Commission): investing terms in plain words.
- Moneysmart’s glossary (Australian Securities and Investments Commission): borrowing, saving and investing terms.
- Ask CFPB (US Consumer Financial Protection Bureau): short answers on credit, loans and bank accounts.
- The Bank of England’s explainers (UK): inflation, interest rates and money in plain words.
Quick answers
What is the difference between APR and APY?
In the US, APR is a yearly rate used for borrowing, such as on credit cards and mortgages. APY, used on savings accounts, counts how often interest compounds over a 365-day period.
Do I have only one credit score?
No. The CFPB says you do not have just one, because each depends on the scoring model, the data used and even the day it was calculated.
Is inflation the same as one thing getting more expensive?
No. The US Federal Reserve says inflation cannot be measured by a rise in the cost of one product or service, or even several. It is about the general level of prices.
What is the difference between the APR and the comparison rate in Australia?
Moneysmart defines the APR as the interest rate charged, excluding fees such as account opening and account keeping fees. The comparison rate adds most fees and charges.
Use this
Our suggestion: three habits for reading any money word, in an offer or in the news.
Which country, what's included, what period?
Quick quiz
Nothing is scored or saved. Recalling it once now is what makes it last.
1. In the US, why is a mortgage APR usually higher than its interest rate?
Answer: It adds points, broker fees and other charges.Read it again ↑
2. In the Bank of England's example, what would a £100 basket cost a year later if CPI inflation is 2%?
Answer: £102.Read it again ↑
3. Under the US savings rule, what does APY count that the plain interest rate does not?
Answer: How often interest compounds.Read it again ↑
How we checked this · Last checked November 2026
- Every definition comes from an official body, and the page names its country: the US Federal Reserve, Consumer Financial Protection Bureau and Securities and Exchange Commission (Investor.gov), the Bank of England, and Australia's ASIC Moneysmart.
- The page names no current interest rates or prices. The 2% figures are the goals each central bank states.
- Compound interest, emergency funds, bull and bear markets and recessions have their own pages, so they get one line and a link here.
- We could not find an official UK page defining AER (the UK savings rate measure), so it is left out.