Celebrating National Financial Literacy Month: 5 Articles to Jumpstart Your Financial Well-Being

April ushers in National Financial Literacy Month at a time when statistics show that most of us could use a refresher in financial education. Recent reports indicate that the average American has five times more in credit card debt than they do in savings.

According to CreditDonkey, the average person’s credit card debt in the United States is $5,331, despite the fact that GoBankingRates found that 58% of Americans don’t have even $1,000 in savings. That imbalance causes significant stress for a large swath of the population — reason enough to celebrate National Financial Literacy Month. 

Fifteen Years of Promoting Financial Literacy

In 2004, Congress established April as the National Financial Literacy Month to highlight its importance and to help teach Americans to establish and maintain healthy financial habits.

The Council for Economic Education, a key sponsor of this initiative, explains that financial illiteracy continues today because of the complexity of our global economy, which makes it increasingly difficult for people to understand how 21st-century economics works.

This also bleeds into personal finances, with members of Generations X, Y, and Z struggling to understand or recognize the implications of revolving credit card debt. CreditDonkey notes that they have the highest rate of revolving credit card usage, with 36 to 37 percent of them keeping a balance on their cards every month.

The Link Between Financial Health and Happiness

This is an unfortunate state of affairs. At Prosper, we believe financial health is a key component of one’s overall happiness and sense of well-being.

For example, our personal loan product has been used by over a million people to refinance high-interest debt or pay for a large purchase. We’ve received thousands of stories telling us how a loan through Prosper has helped individuals and families get back on the path to financial stability, which has significantly improved their overall quality of life.

Taking the First Step Toward Financial Well-Being

While it may seem daunting at first, learning some basic financial planning and money-management skills is your first step toward achieving long-term financial well-being. You can start with the Prosper Blog, where we regularly share financial tips and insights.

To kick off National Financial Literacy Month, we’re sharing some of our community’s favorite blog posts. Hopefully they’ll inspire you to make a positive change on your path to financial well-being:

  1. Expert Advice on How to Grow Your Savings in 2019
  2. Freezing Your Credit: How it Works
  3. 7 Debt Myths to Ditch ASAP
  4. How to Give Yourself a Financial Checkup
  5. Credit Cards vs. Personal Loans: Which is Right for You?

More on Financial Literacy

We’ve also gathered this list of other great resources that provide a wealth of financial literacy tips, ideas, and advice:

  1. Financial Literacy 101: Browse through 12 financial topics ranging from budgeting and spending to credit reports and identity theft.
  2. Consumer Financial Protection Bureau’s Consumer Tools: Learn more about 11 money topics (bank accounts, credit cards, mortgages, etc.) and read through seven guides on issues such as paying for college and planning for retirement.
  3. Practical Money Skills: This 27-year old Visa-led private-public partnership provides money-related interactive tools and educational resources for people of all ages.
  4. Smart Money: This FDIC-sponsored financial education program features a podcast network that covers topics such as the Basics of Banking, Checking Accounts, Savings/Spending Plan and Borrowing Money.
  5. Building Wealth – A Beginner’s Guide to Securing Your Financial Future: This workbook created by the Federal Reserve Bank of Dallas is filled with exercises that help you understand how to build your own wealth for a happier and more secure future.

Stay tuned throughout the month of April as we share more content focused on your financial wellness.

How to Give Yourself a Financial Checkup

Are you on the road to financial freedom or do you need to make a U-turn? Regardless of your financial situation, November is a great time to take a look at your personal financial situation and give yourself a financial checkup. Why now, you ask? If you move fast, you will probably be able to make adjustments before the end of the year, possibly taking advantage of any tax-saving strategies.

Here’s six tips on how to give yourself a financial checkup today:

Take a Look at Your Budget and Identify Goals

This is the first step in your personal journey to financial well-being. Review your current budget and make sure it still makes sense. Have you taken into account all of the upcoming expenses for the new school year? Winter vacation? Holiday shopping, etc.? If you’re nodding your head “No,” it’s probably best that you whip out a paper and pen and account for all of your needs, wants and desires. You can download a budget worksheet on page 4 of Prosper’s literacy guide, Dollars & Sense.

Credit Report and Score

If you haven’t recently snagged a copy of your credit report, now is a good time to get one. Review your report annually to ensure there are no errors or fraudulent accounts. It’s also a good practice to  monitor your credit score on a regular basis. Many personal finance apps give consumers free access to their credit score monthly.

Evaluate Your Debt

One way to get on top of your finances is to control your spending and pay down your debt. Sites like Credit.com have calculators that can help you figure out your debt-to-income ratio.

After doing the math, if you still find that you’re struggling with debt and to get on a new path, you might want to to consult a financial expert for advice or consolidate your debt through taking out a personal loan.

Don’t (Over) Tax Yourself

Take a look at your paycheck and recalibrate your withholding amounts accordingly. You might be earning more or less than expected and may want to adjust your W-9 form.

Insurance

Another thing to check is your insurance coverage. While you probably have enough, make sure you’re taking into consideration any upcoming life changes or new phases like family planning.

Review your Investments and Retirement Plans

Make sure your portfolio is diversified for long-term success. Many financial experts say as you get older, it’s wise to move your investments so that a higher percentage of your money is invested in less volatile vehicles like bonds instead of stocks. Moreover, in addition to the stock market and alternative investment vehicles like Prosper, you might want to make sure you’re personally investing in your future by creating or adding to your 401(k) or retirement savings plan.

What Is A Credit Score? All Your Credit Questions Answered

If you’re early on your financial journey or trying to learn how to better manage your finances, you may be asking yourself: What is a credit score? Your credit score is one of the most important–if not the most important–aspect of your financial life. It affects your ability to purchase a home, take out a loan, buy a car, and more. To understand what it means to build credit and manage your finances, you must first understand what a credit score really is. 

What is a credit score?

A credit score is a 3-digit number that summarizes your credit history, represents your financial track record, and lets financial institutions see the risk of lending to you. Think of it as a report card for how you’ve handled money during your lifetime.

What is considered a good score?

Credit scores fall on a scale from 300 to 850. A credit score above 720 is excellent and will help you earn more favorable terms when it comes to establishing future payments and interest rates. A credit score below 620 is considered a bad score and will negatively impact your financial abilities in the future if it stays that way. A score that falls somewhere around 670 or greater is still considered a generally good credit score.

How are scores calculated?

There are 3 main credit bureaus–Equifax, Experian, and TransUnion–that manage credit reports. By law, you are entitled to one free credit report every 12 months from each major agency by visiting AnnualCreditReport.com. It’s a good practice to regularly check your reports for errors and inaccuracies, such as the same debt being listed multiple times. If you find an error, follow the formal dispute procedures.

Your score is determined through a credit report. Your credit report and score are two different things–one is used to determine the other. A credit report evaluates your payment history, types of credit used, length of credit history, account standings, level of debt, and more to determine your score.

Each credit bureau has different scoring models to determine credit scores. All 3 bureaus collaborated to form the VantageScore model in an effort to score more consistently across each. This scoring model is becoming more popular, although a FICO score is the most common score determined by credit bureaus. 

Is it normal to have many different scores?

Don’t be alarmed to see slightly different scores based on where your report was run. This is normal. Each of the 3 credit bureaus has slightly different data, which are factored into your reports. Plus, the timing of your report may affect your score since scores are not calculated on a fixed schedule. And finally, each company has slightly different scoring models that are updated frequently and used for different purposes. 

For example, if you’re applying for an auto loan, the lender may use the FICO Auto Score 8 model and your score could be 700. If you’re applying for a personal loan, a different lender may use the TransUnion model and your score could be 750. Your scores should generally fall within a similar range–but if you don’t get identical scores from different reporting companies, don’t stress it.

What is the average score?

The average credit score in America varies greatly based on the credit holder’s age, geographic location, and economic opportunity. However, as of 2019, the average score in the U.S. is at an all-time high at 695. Generally, the average score falls between 660 and 720. 

What influences your score?

While each credit scoring model is unique and prioritizes different parts of your credit history, there are several factors that typically play a key role in influencing your score.

  • Your payment history

    This is one of the most important factors and can account for about 35% of a FICO score. Scoring models look to your past behavior to predict what you’ll do in the future—and they want to see that you have an established history of making on-time payments. The degree to which a late payment may impact your score depends on multiple factors, such as how recent it is, how frequently you’ve paid late, and how late the payment was.

  • Percentage of credit limit used

    This factor can be highly influential and applies primarily to revolving debt (credit cards). Experts typically recommend that you keep your balances below 30% of your credit limit to prevent your score from dropping. The ratio of balances to credit limit is also known as your credit utilization ratio. For example, if you have three credit cards, each with a $2,000 balance and a limit of $3,000, your credit utilization ratio is 67% ($6,000 total balance divided by $9,000 total limit), which may hurt your score.

  • Age and type of credit

    Another factor that can be influential is the age of your credit accounts. Generally, your score will improve the longer your accounts have been open. Many scoring models also consider the variety of types of credit that you’re using. The models typically want to see that you have an established history of responsible payments across multiple types of credit, from installment loans to credit cards and beyond.

  • New credit inquiries

    When you request credit, the lender will pull your credit report, which typically results in a hard inquiry on your credit report. Hard inquiries usually impact your credit score. If you have a high number of hard inquiries, many scoring models take that as a sign of risk, as you could potentially be loading up on new debt that’s difficult to pay off. It’s important to note that most scoring models understand that you may be comparison shopping for the best terms on one loan, which could result in multiple hard inquiries. As such, most models treat multiple inquiries for the same kind of debt as a single inquiry, as long as they happen within a short time frame. Overall, hard inquiries are less influential than other factors when it comes to your scores. It’s also important to note the difference between hard and soft inquiries. A soft inquiry is made when you check your own credit or when your credit is checked outside of a lender’s decision-making process. For example, if you request offers from a peer-to-peer lending platform such as Prosper, or if a potential employer checks your credit, a soft inquiry would be recorded. Soft inquiries do not impact your scores.

  • Negative information

    Negative public records on your credit report, such as accounts in collection and bankruptcy filings, can seriously hurt your credit scores as they are related to your payment history—the factor typically given the most weight when calculating your scores.

It’s worth clarifying that several things do not influence your score, including race, religion, gender, age, salary, occupation, employer, and marital status. If you’re interested in improving your score, there are several things you can do, including consolidating your debt and paying down your credit card balances.

What if you don’t have a score?

If you’ve never used credit before, it’s entirely possible that your credit report contains little or no information and you don’t have a score. To start responsibly building a credit history, you can consider several options, including opening a joint account with someone who has solid credit or becoming an authorized signer on their account. You could also open a secured credit card and pay the balance in full each month to start establishing a healthy credit history.

We can all strive to establish excellent credit and an important first step is understanding how scores work. Now that you’re familiar with the basics, you have the ability to build a better score and improve your financial well-being.

Read more to find out 6 things you can do to improve your credit score.

Understanding your APR

When you’re shopping for a personal loan, the first thing you’ll likely want to know is what the interest rate will be. But when you’re figuring out the total cost of a loan, interest rates are just the beginning. They don’t tell you everything you need to know, because interest rates alone don’t take into account any fees you may be charged during the life of your loan. One good example is the origination fee, a one-time fee the loan provider charges for processing the loan.

Most lenders charge an origination fee. Some set a dollar amount, but lenders usually structure the fee as a percentage of the loan amount. For example, online lending platforms like Prosper.com charge origination fees that range from 2.41% to 5%. Your credit rating may determine the origination fee.

For example, if you borrow $5,000, you would be charged an additional $50 to $250 on top of the interest rate. Borrowing $10,000 would cost you between $100 and $500 in origination fees.  Depending on the loan product that you select, the origination fee may be taken out of the loan proceeds (borrow $10,000 and receive $9,500 in funds) or charged in addition to the proceeds (borrow $10,500 and receive $10,000 in funds).

The origination fee isn’t included in the interest rate, which can make it hard to know whether or not you’re paying it. To consider them together, you’ll need to understand your APR.

What is APR?

Your interest rate is determined by your creditworthiness, the length of the loan and other factors. Personal loans have a fixed rate, so your payments won’t fluctuate from month to month. Instead, you’ll be charged equal monthly installments.

But that’s not all of what you’ll be charged in order to borrow. APR, or annual percentage rate, provides a clearer picture of your loan’s true cost because it reflects your loan’s annual interest rate including all fees to originate the loan. Like the interest rate, APR is expressed as a percentage.

APR is a good way to compare loans from different loan providers and lending platforms so you can make apples-to-apples comparisons, even if you are quoted the same interest rate for different loans. In some cases, a loan with a higher interest rate but a low origination fee could end up costing you less because its APR is lower after factoring in the origination fee.

APR is a complicated mathematical formula, so it’s best to use an online calculator to run the calculation. To do so, you’ll need the following pieces of information:

  • Your loan amount
  • The length of the loan
  • Interest rate
  • Origination fee

Loan providers are legally required to provide you with both your interest rate and APR as part of any loan agreement.

Several ways to pay origination fees

The origination fee reimburses lenders for performing due diligence, like pulling your credit report and verifying supporting documents. Most personal loan providers charge an origination fee, but they don’t all charge it the same way.

Some require you to pay your origination fee right away by deducting it from your total loan amount. Let’s say you take out a $5,000 loan with a 2% origination fee, making that fee $100. At closing, you would only receive $4,900 because the lender would hold back $100 to pay the origination fee. However, you would be required to repay — and pay interest on — the full $5,000. In this case, it’s easy to see how much you’re paying because you do not receive the full amount of the loan.

Other loan providers add the origination fee to your loan total. Using the same example, if you wanted to borrow $5,000, you would be required to repay $5,100 plus interest, which would result in slightly higher monthly payments than the upfront method.

You may prefer one method or the other, depending on your circumstances. Paying off the origination fee over the life of the loan may be easier to handle given other constraints in your budget. You may not have enough funds on hand to pay the fee upfront, which may be the very reason you are taking out a personal loan in the first place.

On the other hand, you might object to the higher borrowing cost associated with rolling the origination fee into the loan amount, and you may prefer to pay the fee upfront and not owe additional interest.

Take the time to research how your loan provider approaches origination fees. If you need to borrow an exact amount, you may end up coming up short if your loan provider deducts the fee from your loan total. In that case, consider borrowing more to make sure you’re covered.

There’s no such thing as a free lunch

Many lenders tout “no fees,” but it’s important to remember you are still being charged by the lender for the loan. Whether you’re paying the origination fee over time or whether it comes out of your loan total at closing, you’re still paying the fee. When the fee is rolled up into the loan amount, it can obscure the fact that an origination fee is being charged, but it’s still there in the form of higher monthly payments.

Comparing the APR for different loan options gives you the transparency you need in order to determine which loan is best for you.

Because there’s no such thing as a free lunch, make sure you understand what the origination fee is and how you must pay it.

Only then can you best decide which repayment method makes the most sense for you and your unique circumstances.

Your Summertime Financial Checkup: Eight Key Components

Can you believe we’re already well into summer? As back-to-school season quickly approaches and the holidays soon after that, consider taking a few hours to complete a summertime financial checkup. Completing a checkup is time well spent: You can assess your progress toward key goals and make adjustments to keep yourself on the path toward financial well-being.

Last November, we covered several great ways to tune up your finances before year-end. It’s smart to come back to several of those strategies during the summer.

Revisit your financial goals

Many of us create financial goals at the beginning of the year. Several months later, it’s a great idea to revisit your goals to make sure they’re still appropriate, and to see if you’re making steady progress toward them. Life events—such as having a baby, changing jobs, or moving to a new city—can have a big impact on your financial circumstances, so make sure your goals and plans reflect your current situation.

For example, say you set a goal in January to save $20,000 by year-end to use toward a down payment on a home. In April, you landed a great new job with higher pay. Could you adjust your savings goal upward or accelerate your timeline? Now is a perfect time to check on your goals and fine-tune your plans for meeting them.

Check your credit report and score

You’re entitled to a free copy of your credit report from each of the major bureaus once every 12 months. If you haven’t checked your report in the last year, now is a good time. Carefully review your report for common errors, such as closed accounts reported as open and incorrect payment details.

Make sure your tax withholdings are appropriate

Pull out your recent paycheck and see how much of your income is being withheld for taxes. The IRS encourages everyone to use its Withholding Calculator on a regular basis—and it’s more important now than ever, given recent changes to the tax law. If you need to adjust your withholding amount, you can give your employer new Form W-4.

Check on your financial foundations

It’s true that some things in your financial life require less attention than others, but you shouldn’t ignore your financial foundations altogether.

Take this opportunity to make sure your emergency fund is sufficient. Does it hold enough money to cover at least three to six months’ worth of living expenses? Perhaps your living expenses have increased recently, or you dipped into the fund and need to replenish it. Take a look and adjust accordingly.

When it comes to your investment portfolio, many experts recommend against checking it too frequently. Over-checking it can lead to knee-jerk emotional reactions and possibly hinder the performance of your investments. It’s important, however, to examine your portfolio a few times each year. Use your summer financial checkup to look at the components of your portfolio and make sure they’re still appropriate for your time horizon and risk tolerance. You can also examine any fees. A financial advisor can be a helpful resource for this element of the checkup.

You’ll also want to check on your flexible spending accounts (FSAs). In general, you must use the money in an FSA within the year. At the end of the year, you’ll likely lose any money left over in your FSA. Look at your FSA balances and think ahead to any eligible expenses that may be coming down the road, such as copayments, prescription medications and other health care costs. Make sure there is alignment between your spending plans and the amount of money you’re putting into your FSA.

Plan for upcoming expenses

Summer might feel like a strange time to be thinking about the holidays, but it’s a great opportunity to start planning for extra expenses. To reach a holiday savings target of $300, for example, it’s much easier to start now and set aside $50 a month than to wait until October and have to carve out $100 each month.

Get organized

Look for opportunities to make managing your finances easier and more efficient. Comb through your bills and see if you can enroll in automatic payment services, or try a new budgeting app. Summer is also a good time to sort through your financial paperwork, like tax returns, receipts and credit card statements. Identify which items can be discarded and which should be filed away.

Look at the interest rate on your savings account.

Interest rates in the US are rising. In an environment where interest rates are increasing, banks are able to charge more for loans, which means they collect more funds. As a result, banks are in a better position to offer higher interest rates on savings accounts and certificates of deposit (CDs) – which is great news for savers.

If you’re working to bolster your savings, every bit of interest can help. Today, a savings account may offer 1.70% annual interest. On a deposit of $5,000, you’d earn $85 in the first year. That’s considerably more than you would have earned in 2015, when interest rates on many savings accounts were closer to 0.80%, earning you just $40 on a $5,000 deposit.

Evaluate your debt repayment plan

If you have variable-rate debt, like credit card balances or a home equity line of credit (HELOC), rising interest rates will likely make it more expensive for you to repay your debt. Even if you only have fixed-rate debt, it’s still wise to include an evaluation of your debt repayment plan as part of your summer financial checkup.

If you’re having trouble keeping up with your payments or want to explore different ways to pay down your debt, take this opportunity to look into transferring your balance(s) to a credit card with a lower interest rate, or learn about consolidating your debt by taking out a personal loan.

Get started by reading our recent guide to simplifying your life with debt consolidation.


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What Savers and Borrowers Need to Know about the Fed’s Recent Rate Change

Let’s go over the fed’s recent rate change. The Federal Reserve (Fed) recently announced a 0.25% increase in its benchmark interest rate to a new range of 1.75% to 2%, the seventh such hike in more than two years. After holding interest rates close to zero for several years following the last downturn, the Fed is now raising rates as the U.S. economy gets stronger.

What does this mean for Americans?

While the headlines might not seem exciting, they have wide-ranging effects on the way consumers and businesses manage their credit and plan their finances. Here we’ll cover important real-life implications for savers and borrowers:

Rising interest rates can help savers.

In an environment where interest rates are increasing, banks are able to charge more for loans, which means they collect more funds. As a result, banks are in a better position to offer higher interest rates on savings accounts and certificates of deposit (CDs) – which is great news for savers.

If you’re working to bolster your savings, every bit of interest can help. Today, a savings account may offer 1.70% annual interest. On a deposit of $5,000, you’d earn $85 annually. That’s considerably more than you would have earned in 2015, when interest rates on many savings accounts were closer to 0.80%, earning you just $40 on a $5,000 deposit.

Rising interest rates can make your existing debt more expensive.

If you have credit card debt, an adjustable-rate mortgage, a home equity line of credit (HELOC) or another form of variable-rate debt, you’ll likely see your interest rates increase. That’s because the interest rates on these loans are generally tied to the prime rate. The prime rate is the rate banks charge their most creditworthy customers (typically big businesses), and it’s closely linked to moves in the Fed’s benchmark rate.

Let’s look specifically at credit cards. Nearly all credit cards base their standard interest rates for purchases on the prime rate. When the prime rate goes up, so does the interest rate you’ll pay on any balance you’re carrying. In fact, experts estimate consumers with credit card debt will likely pay an additional $2.2 billion in interest annually, thanks to the Fed’s recent rate hike.

How quickly will you see your interest rates increase as a result of the fed’s recent rate change?

It depends on your card issuer, but it’s likely to happen quickly. Many issuers change their interest rates at the start of the next billing cycle following a change in the prime rate. Other card issuers make changes on a quarterly basis. Be sure to read your credit card agreement to see how your issuer sets and adjusts interest rates.

Here’s an example of the effects:

Say your credit card charges interest equal to the prime rate plus 15% for any balance you carry on purchases. With a prime rate of 5%, that means your interest rate is 20%.

If you’re carrying a balance of $10,000 and making the minimum payment each month (representing 6% of your outstanding balance), you’ll spend a total of $13,795 to pay off the balance over several years.

If the Fed raises its benchmark interest rate 1% over the next year and the prime rate also goes up 1%, your interest rate would climb to 21%. If you continue making minimum payments, you’d now spend a total of $14,063 to pay off the balance. Paying off your debt just got more expensive, to the tune of several hundred dollars.

Looking at it another way, when the Fed hikes rates by 0.25% and the prime rate goes up the same amount, that would equal an extra $2.50 each year in interest for every $1,000 in variable-rate balances that you carry.

If you’re curious about various interest rate scenarios, you can check out a credit card payoff calculator.

Managing Rising Interest Rates

As the examples above illustrate, rising interest rates as a result of the fed’s recent rate change can quickly make your variable-rate debt significantly more expensive. And as it gets more expensive to keep up with debt, some borrowers may risk falling behind on payments, which can result in costly late fees and penalty rates. Many experts recommend paying off your credit card balance(s) as quickly as you can. Get started by revisiting your budget to see where you can make changes that will free up extra dollars to put toward paying down your balances.

Managing Debt and Rising Interest Rates

If you can not pay off your debts, you may  also consider transferring your balance(s) to a card with a lower interest rate, or think about consolidating your credit card and other variable-rate debts by taking out a personal loan. Personal loans typically have a fixed interest rate – which means it will stay the same over the life your loan – so you can avoid the rising interest-rate roller coaster. Personal loans also generally have a fixed term, so you’ll know exactly how much you owe and when the loan will be paid off in full. Debt consolidation involves taking out a new loan, so it may not be the best option for all borrowers. Depending on your circumstances, a personal loan has the potential to simplify your life in a rising-rate environment, help you reach your financial goals and improve your overall well-being.

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