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Your Financial ABC’s: Learn and Prosper

We've all been there: we go to a website to search for financial products, but we are confused by some terms. What does APR mean? What is FICO? I need a credit history. But what exactly is that?

Don't worry! We break down financial terms for you so that you're clear when you're working on your finances, such as bank applications, tax returns, mortgages, and more.

If you're applying for a loan or credit card

When planning your finances around a loan, the principal will play an important role - when you begin to pay back the loan, most of your payments will cover the principal.

On the other hand, the interest rate is key when choosing a bank entity to apply for a loan.

1. Principal: The amount of money that is requested from the bank or financial entity. It does not include interest or other additional expenses that may be associated with the loan. Once approved, it is the amount on which interest is calculated, and the total monthly loan payment is established.

2. Interest rate: This is the percentage that is paid to the bank on the borrowed money. This represents a percentage of the credit and will be added to your monthly payment.

3. Annual Percentage Rate (APR): Represents the cost to be paid annually for the principal, or amount of money to be loaned.

Whether your applying for a loan or credit card, a good credit history is important to be able to receive the lowest interest rate.

Popular x Platea Tip: Find out about 3 credit cards that suit your lifestyle here.

To determine if credit is granted or not

In addition to the interest rate, you will also need to know your credit history and credit score.

1. Credit Report: A report that details your credit accounts, outstanding balances, and how you manage your credit.

2. Credit score: A number that reflects the information from your credit history that institutions use, among other factors, to decide whether or not to grant you credit.

Popular x Platea Tip: Your credit is a must; learn how to create and establish it.

3. FICO score: The Fair Isaac Corporation (FICO) pioneered the development of a credit score system based on information collected by credit reporting companies. It is one of the most widely used by banking institutions to calculate credit scores, assess risk, determine interest rates, and decide whether to grant a customer a loan or credit card.

4. Debt-to-income ratio (DTI): The portion of your monthly income that is directed to paying your monthly credit debts. This may include housing expenses for credit debt payments such as credit cards, personal loans, mortgages, among others. Lenders also use this number to determine risk and set a loan amount, if you are applying for a mortgage, a car loan, or any other type of loan.

Popular x Platea Tip: The debt-to-income ratio should be less than 30%. For example, if you earn $3,000 per month, the goal is that your total debt payments are no more than $900.

If you are applying for a mortgage

When applying for a home loan, there are factors that will help determine the amount of money borrowed, such as your income, your ability to repay and the appraisal value of the property.

1. Appraisal: It is an independent report issued by a professional, used to estimate the value of a real estate property in relation to the market.

2. Conventional mortgage: Any mortgage loan not insured or guaranteed by the Federal Government.

3. Option payment: The amount of money you pay when you option a property.

4. FHA: Mortgage loan insured by the Federal Housing Administration. It allows you to finance the purchase of your primary residence, up to 96.5% of the sale price.  Thus, the down payment will be lower, and the maximum approved amount will vary according to the municipality where the property is located.

5. Closing costs: Includes all the expenses necessary to process your mortgage loan, such as origination fees, title study, appraisal, legal fees, among others.

Popular x Platea Tip: Learn here 5 things you should know before buying a house.

When filling out your tax returns

The income tax return is the official document through which you inform the Government of your annual income and expenses. To fill it out, you are asked for:

1. Adjusted gross income: Total income minus deductions or adjustments to income. This is used to determine the payment of taxes.

2. Form W-2PR: If you work as an employee, this is the form that your employer provides you with detailing everything they have paid and withheld from you.

3. Form 499 R-4.1: This is provided to you in your workplace to determine how much money will be withheld from you. In the USA, the W-4 is used. 

4. Deductible expenses: Expenses that you can subtract from income subject to contribution, such as mortgage interest and donations, reducing taxes.

Recurring financial terms

1. Assets: Resources and goods (economic or not) that belong to a person or company.

2. Liabilities: Debts and obligations of a person or company.

3. IRA Account: Savings accounts that help you save for your retirement age.

4. Bonds: Payment promises that governments and companies generate to raise funds. They work as a loan where the person or entity that buys them expects a return on their investment.

5. Stocks: Value that represents that you are a participating owner of a fraction of a company.

6. Equity: Economic value of a company. It represents the amount of money that would be returned to the shareholders or owners when a company is liquidated.

7. Umbrella insurance: Type of insurance that offers additional protection when exhausting the limits of other existing policies, such as auto or property.

8. Net to XX days: It refers to the payment condition that determines the number of days in which an invoice must be paid.

Daily slang

And to lighten the heavy topics ... these terms do not come out on the bank pages, but that does not make them less important.

1. Fajón: Person who works hard to succeed financially.

2. Stretch the bill: Get the most out of the money you have left.

3. Cachetero: A clever person money manager, someone who knows how to take advantage of financial opportunities.

4. Cuenta virá: When you have the money or budget available to make your fixed expenses and save for your trips.

Keeping up with financial language

The world of finance is huge, and here we are to guide you along the way. Explore more resources and educational guides, on our Future Me landing page.