APR, FICO, HELOC and The FAQ's on these Little Initials and More

APR, FICO and HELOC are just some of the terms that are used in conjunction with obtaining credit and personal loans or mortgages.  It can be very confusing when you do not know what these mean, so here are some explanations that should help you to understand.

APR is the initials used which mean Annual Percentage Rate.  This is when you take your interest along with any one-time fees and cost that you have paid and calculate it in a way that computes the effective rate. These fees and cost are items such as points, discount fees, pre-paid interest, processing fees, underwriting fees, document prep fees, Private mortgage-insurance, loan application fee, and credit life insurance. 

In other words, it is the total cost of credit to you, shown as a yearly percent of the total sum of credit granted.  The APR does not ever affect your monthly payments; its purpose is to make it easier for you to compare lenders and loan choices.

When you are dealing with credit cards, there are different APR calculations depending on how you have used the card.  If you are using the card to make an actual purchase the APR is lower than if you were to use the card to withdraw cash.  Your APR is higher when you have over limit fees or late fees.  Balance transfers can make your APR go higher or lower, the reason being is that sometime a new company will offer you a 0.00% interest on balance transfers when you first open an account with them, whereas if you do balance a balance transfer with an existing card, they generally charge more.  Then you have the APRs that will vary depending on the balance due on any open credit or loan accounts.  Your APR can also become higher if you are penalized for making repeated late payments during a specified time period

It is possible to get the starting APR lowered by negotiating with the lenders and credit companies, however you do need to remember that the APR does not affect your payments and once your APR is set, it generally only raises through a mistake on your part.

FICO is an acronym for Fair Isaac Credit Organization, which provides different levels of financial services.  From mortgages to insurance and healthcare. When you hear or see FICO score this is a formula that was created by the company in order to give each person a score, or “credit risk level” for their credit.  When you apply for credit, the lenders request a credit report, which supplies them not only with your credit history, but a score (FICO) based on that history.

When your FICO score (sometime referred to as Beacon Score) is created, there are five areas that they look at a percentage point for each of those areas:

1. Your payment history (35%)
2. Amounts owed to others (30%)
3. How long you have had a credit history (15%)
4. How much new credit you have (10%)
5. What type of credit is in use (mortgage, credit cards, auto loans, etc.) (10%)

When you have a high FICO score, you are considered less of a credit risk; therefore you are offered a lower interest rate.  So the opposite applies to when you have a low FICO score.  Sometime your score is so low, you can’t get any credit at all.

HELOC is an easy way of saying Home Equity Line of Credit.  A HELOC is when you are taking out a mortgage on your home and you are using the equity in your home to secure the loan.  It is not a standard mortgage where you have fixed payments for a fixed number of years.  Instead it is a line of credit, which you can use and repay in large or small sums over and over again until then end of the term, which can be 5, 10, 15 or more years.  The interest with a HELOC is generally a variable rate, which means the rate will adjust according to the public margin.  The interest rate will have a cap on it so there is a maximum amount that it can change.  The good part about a HELOC is that you only pay interest on the amount of money that you have actually used, not on the entire loan amount.

When applying for a home equity line of credit, you are approved according to how much equity is in your home at the time of the appraisal.  The lender will also look at things such as your debt to income ratio and credit history.  Once the loan is approved, you make draws against the available funds, generally by writing a check from HELOC account.  Make sure that you are aware and understand if there are any limitations on how much you can draw at one time.  If you sell you home, then the HELOC is paid off as part of the sale, just like your standard mortgage.

When you are unsure of the acronyms and abbreviations that are used in the credit and lending industry, you should consult with someone that can explain them to you.  Knowing what they mean gives you an advantage and could possibly help you when it comes to negotiating your loan and credit terms.