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Breaking down the terms: FICO Score & APR

At My Home Pathway, we're committed to more than helping you own a home. We're committed to helping you improve your financial literacy. All those things you should have been taught in school, but weren't. Like, for example, what is a FICO score? Today we're breaking down two common financial terms that you need to know when setting out on your journey to home ownership.

What is a FICO Score?

A FICO score is a three digit number that can range from 300 to 850 and helps lenders make better decisions on whether or not to provide a loan. You can essentially think of it as your financial report card. Just like in school, there are several factors that contribute to your overall grade. For FICO scores those factors are:

  • Payment History (35%)

  • Amounts Owed (30%)

  • Length of Credit History (15%)

  • New Credit (10%)

  • Credit Mix (10%)

Because these scores are used by institutions to make decisions on loans, it’s very important for you as a consumer to be focused on your FICO score and ensuring you’re doing all that you can to keep it high or to improve it if it is not in one of the better categories. Without a high FICO score it may be challenging to find access to capital when you need it such as when you’re looking to buy a home.

What is APR?

So what is APR? APR stands for Annual Percentage Rate which is your interest rate stated in terms of a yearly basis. In my laymen’s terms it basically means it is how much it will cost you to borrow money. It’s the amount of money you’ll have to pay in addition to the total amount you’ve borrowed in order to be given a loan. To calculate this you can leverage the following formula:

APR can come in two flavors. Fixed and variable. Fixed is quite simple. It basically means that the rate you pay on your loan is fixed for the entire lifetime of that loan. A variable APR is one that changes in relation to an index throughout the lifetime of that loan. These can be tied to such things as the prime rate published by the Wall Street Journal. As such, if the prime rate were to go up, so would your interest rate. Depending on the economic circumstances this arrangement can work in or against your favor so it’s important you keep up to date with policies or check with a financial advisor before making any binding decisions.

Now, why is APR important? APR comes into play when you start to deal with credit products such as car loans and mortgages. It’s important because over the long-run it could be the difference between you being financially stable or not. As such it’s very important that you work on having a good credit score to put yourself in a position to get the best APR you can when you need it. Someone with a good credit score may be able to afford their dream car or home simply because they have good credit. Alternatively someone with a bad credit score can be looking at the car or home but will ultimately have to pay more or compromise for something at a lower tier because it’s the only financially viable option. Furthermore, should you ever want to refinance you’re much more likely to get approved for more favorable terms if you have a good credit score.

So all in all, an APR is important to your financial health but it’s ultimately a symptom rather than the cause. If you want financial stability and a calculated path towards home-ownership you’ll understand where you stand, where you need to be and how you can improve in terms of your credit score. If you're ready to take the next steps, sign up for updates at https://myhomepathway.com/.