Harper: Hard-to-understand terms sometimes need explanation

When you consider a purchase on credit or an investment, you may encounter some financial terms that are important to understand. I'll cover some of them.


This is a percentage that you earn on an investment or pay for a loan. It's also known as the “cost of money.”

If you invest $10,000 and earn 5 percent interest, your interest income is $500 per year.

For loans, the amount of interest you pay is computed on the outstanding amount of the loan (the “principal”), so as you pay down the loan, the amount of interest that you pay also decreases.


Often you will see this quoted along with an interest rate for a home loan. For example, a 30-year fixed loan at 4 percent, APR 4.27 percent. The APR computes the cost of money by including closing costs and any fees associated with the loan (such as points and mortgage insurance premiums).

Generally, the APR is higher than the nominal interest rate. When comparing two loans, you should compare the APRs as well as the nominal interest rate.


When you apply for a loan, the loan company will request a FICO score, which measures your creditworthiness. There are three main credit rating agencies in the U.S. – Experian, Equifax and Trans Union. Your FICO score may differ from each agency, so loan companies usually will run two or three FICO scores. The scores range from 300 to 850, with 850 being the best.

According to, a rating of 720 or higher is considered a good credit rating, although many lenders will provide loans with scores in the 600s and lower with adequate explanation.

You can get a free copy of your credit report once a year by contacting credit agencies.


This is a measure of a stock's price to its earnings. For example, if a stock's price is $20 and its annual earnings per share is $2, then the P/E ratio is 20/2 = 10. Looking at it another way, if you invest $20 and receive $2 in annual income, your interest rate or return is 2/20 = 10 percent.

The P/E can be computed on the previous 12 months earnings (Trailing P/E) or on the next 12 months (Forward P/E).


Some companies distribute cash, called a dividend, on a monthly, quarterly or annual basis to their shareholders. When investing in a stock that pays a dividend, your return is the dividend payments plus or minus any increase or decrease in the share price. Dividends also can be paid in stock, which is called a stock dividend.


A stock split is similar to a stock dividend but generally made when there is a distribution of more than 25 percent of the stock.

A 2-for-1 split is the most common, where each shareholder receives one additional share for each share they own and the stock price is cut in half. Companies that do stock splits to be in a certain trading range, such as under $100, so if the price gets over $100, they will do a stock split to get the price down to $50.


This is the tax rate for any additional income you earn.

For example, if your taxable income for 2012 was $100,000 and you are married filing jointly, you are in the 25 percent tax bracket for federal and 9.3 percent for California.

This means that for each additional dollar you earn (assuming it is ordinary income) you will owe 34 cents of income tax. In other words, your marginal tax rate for federal and California is 34.3 percent. This is important when comparing investments between taxable or tax-advantaged options.

If you ever encounter a term that you do not understand, make sure to ask a trusted adviser.


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