Rising home values in your area could be a cause for celebration — but what if you don’t want to sell your home? You may still tap your newfound home equity by borrowing against it. Home equity can be the cheapest way to pull off a remodeling project, consolidate high-interest debt, start a business, or pay for any big-ticket purchase. Here’s what it takes to convert home equity into useful money.

How do home equity loans work?

Home equity is the difference between your property value and the total of loans against it. If you owe $200,000 on a house valued at $350,000, you have $150,000 in home equity. Home equity financing allows you to borrow against some of it.

Home equity loans are mortgages, just like the mortgage you probably took out to buy your house. In fact, one name for home equity loans is “second mortgages.” Most home equity loans come with fixed interest rates and payments. You typically get between five and 20 years to repay these loans, but some programs give you up to 30 years to repay.

When you apply for a home equity loan, you complete the same form you did for your “first” mortgage. You go through a similar underwriting, escrow, and funding process. At closing, you receive a lump sum, which you begin repaying the following month.

Top uses for home equity loans

Home equity is a primary source of wealth for average American families. So, most personal finance advisors don’t recommend spending it casually. However, home equity is ideal for some uses — especially those that improve your financial or personal health. Here are some examples:

• Finance college tuition (assuming the degree pays off in the future)
• Fund a new business (do your homework to make sure it succeeds)
• Cover a remodeling project (consider how much home equity the project will add)
• Add an additional dwelling unit (ADU) for rental income
• Buy a vacation cabin or tiny home
• Pay for an expensive medical procedure like a knee replacement
• Consolidate high-interest debt (only if you address overspending problems first)

Home equity is a popular source of financing because interest rates are lower, and longer loan terms make payments more affordable.

How much can you borrow with a home equity loan?

To see how much cash you can unlock with a home equity loan, you must first understand two terms — loan to value, or LTV, and combined loan to value, or CLTV. Home equity lenders use both of these terms when underwriting your loan application.

Loan to value (LTV) is the ratio of your first mortgage balance to your property value. If you have a $100,000 home with an $80,000 mortgage, your LTV = $80k / $100k = .8, or 80%.

Combined loan to value, or CLTV, equals the total of all loans against your home divided by its current value. So if you took out a $10,000 second mortgage against your $100,000 home, your CLTV = ($80,000 + $10,000) / $100,000 = .9 or 90%.

Most lenders allow CLTVs of 80% to 90% when underwriting home equity loans. Generally, the less risky you are, the more lenders let you borrow. To see how much you could borrow with a home equity loan, take these steps:

• Get an estimate of your home value. You can find many online estimators or ask a local real estate agent.
• Multiply your estimated home value by 80%, 85% or 90%.
• Subtract your current mortgage balance.

If your home is worth $400,000 and you owe $300,000, your maximum home equity loan amounts would be as follows:

• ($400k * 0.80) – $300k = $20,000
• ($400k * 0.85) – $300k = $40,000
• ($400k * 0.90) – $300k = $60,000

Home equity loan costs and interest rates

Home equity loan interest rates are higher than first mortgage interest rates. Second mortgages are riskier than first mortgages because their lenders are in the second position. Here’s how the second position works: if you have one mortgage and don’t make your payments, your lender can sell your home and probably recoup its money. But a lender with a second mortgage only gets repaid after the first lender gets its money — if there’s enough left over.

The fees for a home equity loan run lower than those for a first mortgage. You need title insurance and escrow services, which may cost a few hundred dollars instead of thousands. Your lender may require a full home appraisal, which costs several hundred dollars, or it may use an in-house valuation program or request an inexpensive “drive-by” or “desk” service from a licensed appraiser.

When comparing home equity loan programs, look at the bottom line. You needn’t care what the fees are called, but your total costs and interest rate matter. Compare identical loan programs — 15-year-fixed to 15-year-fixed, etc. Then look at the loans’ APRs, or annual percentage rates. The APR includes the interest charged plus loan fees. That makes it easier to compare offers. Another way is to fix one side of the equation — tell every lender that you want a loan at 6% and see what each lender charges to get it. Or ask for a loan at zero cost and see what rate each lender offers you.

How to get a home equity loan

It takes several simple steps to get a home equity loan. First, do a little homework:

• Check your credit score for free. Lenders need it to give you a meaningful interest rate quote.
• Estimate your home value with one of many online property value estimators or ask a local real estate agent.
• Get your current mortgage balance. It’s probably on your credit report, or you can call your lender.
• Contact several home equity lenders to see if they offer the loan amount and teat you want. Get a written Loan Estimate (LE) disclosure or a loan scenario for those who make the cut.
• Compare loans and costs among programs and choose a lender.

Gather documents proving your income and assets. That probably means a recent pay stub or tax return and copies of all account statements. Next, you complete an application. Usually, that’s Fannie Mae Form 1003. Expect to provide employment and address information going back at least two years. You are asked about debts and assets, including real estate you own and all bank, investment, and retirement accounts. You may have to pay fees for a credit report and/or appraisal.

Your lender will probably use automated underwriting systems (AUS) to get a preliminary decision. If you receive approval (yay), you are given a list of documents and information needed to finalize your approval and close your loan. It’s important to clear these conditions ASAP, or your loan will stall. Once you have final loan approval from a human underwriter, the lender draws up loan documents for your signature. Make sure that the final loan application is correct because you’re responsible for whatever you sign. Double-check the loan amount, interest rate, term, and fees to ensure no surprises.

Once you sign everything, you have three days to rescind (cancel) your loan if you choose. Federal law requires the lender to wait these three days before funding your loan. After the rescission period, you either get a check or an electronic fund transfer. Or, if you’re consolidating debt, the lender might pay off your accounts directly. The county recorder’s office makes it official, and you’re done.

Home equity loan alternatives

In addition to the standard home equity loan, there are other home equity products, the HELOC and convertible HELOC.

The HELOC, or home equity line of credit, is another way to borrow against your home equity. Instead of a lump sum, you get a line of credit to tap and repay as needed. Most HELOCs come with variable interest rates, but some newer products offer fixed interest rates. A HELOC may be better than a home equity loan if you don’t need a lump sum all at once. They let you pay interest only on the amounts you use.

HELOCs, unlike standard home equity loans, have two phases — the draw period and the repayment period. During the draw period, you use the credit line like a credit card, draw on it, and make minimum payments. But once you enter the repayment period, you can’t tap the credit line, and you must repay it in full over the remaining loan term. This can cause the monthly payment to increase sharply.

Convertible HELOCs have variable interest rates but allow you to convert the loan to a fixed home equity loan at one or more times. This can make a HELOC safer and more predictable.

The last way to tap home equity is the cash-out refinance mortgage. Cash-out refinancing means refinancing your current mortgage with a larger home loan and taking the difference in cash. Cash-out refinancing is usually much more expensive than traditional refinancing because fees apply to the entire loan–not just the cash-out. If you want to refinance your current home mortgage and get additional cash, it’s probably cheaper to refinance your first mortgage and then add a home equity loan for the cash.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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It’s easy to believe that you can’t get through college without a load of debt. In fact, 30% of students graduate from a two- or four-year degree program debt-free. And another 25% graduate with $20,000 or less in student loan balances. How do they do this?

Student loans by the numbers: who owes what?

Student debt isn’t the shattering six-figure problem that news outlets make it out to be. Undergrads dependent on their parents are only allowed $31,000 in federally-backed student loans, and independent undergrads (usually over 24 years old) max out at $57,500. According to the Brookings Institution, students whose college debt exceeds those amounts at graduation have nearly all borrowed for graduate school. And only 6% of borrowers owe more than $100,000.

However, where you go to school matters. Just 12% of graduates of public four-year schools owe $40,000 or more, while 34% graduate without student loan balances. Private school students fared a little worse, with 20% of four-year grads owing $40,000 or more and 25% having no student debt. And for-profit schools? Just 12% of students graduated debt-free, while 48% carried loan balances of $40,000 or more after graduation.

What about two-year programs? Fully 59% of those earning associate degrees from community colleges graduated debt-free. However, only 12% of for-profit students finished their associate degrees unburdened by loans.

Is college still worth it?

Is all this debt for higher education worth it? In the past, it was common knowledge that college grads earned significantly more over their lifetimes than their non-degreed counterparts. And higher education was generally considered worth the price, even if one had to borrow. But is that true today? The Education Data Initiative recently published some interesting numbers about student borrowing and earnings by education level. Here’s what they uncovered about the monetary benefit of higher education and how much people borrowed to get there:

According to the National Center for Education Statistics, those with only a high school diploma and no higher education earn about $40,000 per year. It is likely of value to attain some higher education that doesn’t result in a degree–perhaps in the form of trade school, certificate, or diploma programs. You can see from the numbers that higher education conveys a lifetime earning advantage even after financing your degree.

That said, graduating without a pile of debt is always better.

Pick your school wisely

As noted above, for-profit colleges tend to generate higher student loan balances. According to the Journal of Financial Economics, students at for-profit colleges pay more for their educations, experience lower graduation rates, and earn less after graduation. Unsurprisingly, these students default on their student loans at much higher rates than other students.

So, an easy way to dodge some significant student debt bullets is to avoid for-profit institutions. Students who graduate with the least amount of debt tend to follow this playbook:

• If you’re still in high school, try getting as much free college credit as possible. Advanced Placement (AP) classes help students test out of many general ed requirements in college. And many schools allow eligible juniors and seniors to take at least some classes at their local college or university for credit at no cost.
• Get your lower division classes out of the way at your local community college. Just make sure your credits will transfer to the four-year school of your choice.
• Complete your degree in-state at a four-year public university or a low-cost alternative. Note that some of the most expensive private universities can be cost-effective because their grants are generous. And some out-of-state programs offer reduced merit-based tuition to students from neighboring states.
• This college scorecard from the U.S. Department of Education ranks colleges and universities based on how much they charge for tuition and the overall cost for students. Use it to compare the costs of specific career or vocational programs and the schools that provide them.
• Seek out tuition-free schools or no-loan schools.

Choosing the right school is important, but it’s just the beginning.

Choose a degree program that delivers

Assuming you’re not attending college just for social opportunities, you’ll want to consider how well the degree you pursue recoups its cost. Research potential careers with the U.S. Bureau of Labor Statistics (BLS). You’ll see what education and experience they require, the size of the job market, and how much you’re likely to earn right away and down the road.

That’s not to say you can’t choose a low-paying career because you love it. Just be aware and look for ways to keep your debt small or get it forgiven through public service or a similar route. Here are 4-year degrees and their annual incomes that present bigger loan repayment challenges:

• Theology and religion $36k
• Social services $37k
• Family and consumer sciences $37k
• Psychology $37.4k
• Leisure and hospitality $38k
• Performing arts $39k
• Early childhood education $40k
• Elementary education $40k
• Special education $40k
• Miscellaneous education $40k

Fortunately, given that many of these lower-paying degrees are in education, teaching in low-income districts for five full-time years can get some or all of your student loans forgiven.

FAFSA is your friend

There are many scholarships, grants, and subsidized loans available. And the Free Application for Federal Student Aid, or FAFSA, is your one-stop shop. It gives you access to federal student assistance, and many colleges and private scholarships also use the form to find programs for which you qualify. The financial aid office at your college is another good place to find help with tuition and other costs. The U.S. Department of Labor also maintains a searchable list of scholarships at its CareerOneStop.

Other sources of tuition money include employers, religious and other organizations, clubs you or your parents belong to, relatives, and even crowdfunding. Consider selling everything you won’t need when you start school and putting the proceeds toward your first semester.

Working and living

If you’re pursuing a degree to increase your lifetime income and job satisfaction, you may have to give up some extracurricular college experiences. Like dorm food, pledging a frat, or drinking your weight in beer every day. You can sidestep a ton of debt by living at home while in school and working part-time to cover your costs. If you’re already on your own, avoid the most expensive places to go to college. Move to a college town with a low cost of living.

Your school’s financial aid office might help you reduce what you owe. It’s called a federal work-study job and is available to students with financial needs. Your school organizes these part-time jobs, which can be on-campus or off-campus. If you get an off-campus job, it will likely involve doing community service work for nonprofits or government agencies, and you’ll earn at least the federal minimum wage. There are two really good things about work-study jobs: first, the money you earn won’t make it harder for you to get financial aid. Unlike other part-time jobs, it won’t affect your eligibility. Second, these jobs are made to fit your school schedule, so you won’t have to choose between work and class. It’s a good idea to apply for a work-study job early because only a limited number are available.

Create a budget that won’t require credit cards to meet your expenses. (Keep one for emergencies if you’re disciplined enough to leave it alone.) If you’ve never lived alone, do some research so you won’t be caught off-guard by the cost of food, transportation, and other necessities.

Enjoy the ride

If you’re on your own and working full-time, check with your employer about tuition reimbursement. Did you know that about half of employers offer some form of tuition reimbursement for graduate or undergraduate students? Typically, reimbursement rates depend on your grades. If you have suitable full-time employment with an excellent benefits package, there’s no reason to rush toward graduation. Take fewer classes, enjoy your work-life balance, and eventually, you’ll get there — with valuable work experience and without crippling debt.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

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If you’re trying to build or protect a good credit rating, credit report blemishes won’t help. What may help is a well-written letter. These four letters can help you discover if a debt is your responsibility, help you remove incorrect credit entries or even delete accurate (but damaging) information. 

• Debt validation letter. When you receive a demand for payment from a debt collector, you’re entitled to proof that you owe the money, including the creditor’s name and the date you incurred the debt or last made a payment. 
• Credit dispute letter. If you believe an entry on your credit report is inaccurate or unfair, you can dispute it in writing with all three major credit bureaus.
• Goodwill letter. If you have a solid history with a creditor but miss a payment (more than 30 days past the due date), you might be able to convince it to report your payment as on time. 
• Pay-for-delete letter. You may be able to arrange for a debt collector to delete a collection account by paying some or all of what you owe.

There is no guarantee that a well-written letter will solve your credit woes, but active credit management is more than paying bills on time and keeping credit utilization low. Sometimes you have to address past actions that impacted your credit. You can add these letters to you personal credit management tool kit.

What is a debt validation letter?

The debt validation letter is a written request for information. You might send a debt validation letter if a debt collector has contacted you and you’re not sure if you owe the money or you haven’t yet decided what to do about it.

Debt validation letters are powerful because once you send one, a collection agency has to stop trying to collect until it double-checks the debt information and mails you written verification, including the original creditor’s name and address.

You have 30 days to dispute a debt after the initial contact by a debt collector. During that 30-day period, collectors can try to collect the debt from you until they get your validation request. 

Debt validation letter sample

You can adapt this sample debt validation letter to your circumstance. Do not admit owing the debt or offer any form of payment until the collector validates the debt and you’ve decided what to do: pay it, negotiate it, fight it or ignore it.

Your Name
Current Date
Your Address

Debt Collector Name
Debt Collector Address

Re: Account Number (if you have it)

Dear Debt Collector Name:

I am responding to your contact about a debt you are trying to collect. You contacted me by (phone/mail) on (date) and identified the debt as (any information they gave you about the debt). Please supply the information below so that I can be fully informed:

Why you think I owe the debt and to whom I owe it, including:

• The name and address of the creditor to whom the debt is currently owed, the account number used by that creditor, and the amount owed.
• If this debt started with a different creditor, provide the name and address of the original creditor, the account number used by that creditor, and the amount owed to that creditor at the time it was transferred.
• Document that there is a valid basis for claiming that I am required to pay the debt to the current creditor. For example, a copy of the written agreement that created my original requirement to pay.

The amount and age of the debt, including:

• A copy of the last billing statement sent to me by the original creditor.
• The amount of the debt when you obtained it, and when that was.
• Itemize any additional interest, adjustments, fees or charges added since the last billing statement from the original creditor. In addition, explain how the added interest, fees or other charges are expressly authorized by the agreement creating the debt or are permitted by law.
• When the creditor claims this debt became due and when it became delinquent.
• Identify the date of the last payment made on this account.

Details about your authority to collect this debt.

• Provide the name on your debt collection license, the date of that license, the state issuing that license, the issuing agency (name, address and phone number) and the license number.

I have asked for this information because I have some questions about your claim that I owe this money.  I am open to communicating with you for this purpose.  In the meantime, please treat this debt as being in dispute and under discussion between us. 

In addition to providing the information requested above, please let me know if you are prepared to accept less than the balance you are claiming is owed. If so, please tell me in writing your offer with the amount you will accept to fully resolve the account.

Thank you for your cooperation. Sincerely,

Your name

What is a dispute letter?

It’s not uncommon for credit reports to contain inaccurate information, and that can hurt your credit score. The easiest way to dispute a credit report error is probably to use the online dispute form for Equifax, TransUnion or Experian.

However, sometimes you might prefer to go directly to the creditor reporting the entry. It can be easier to have only one entity to contact, one set of documentation to provide and one letter to write. In addition, it’s not uncommon for credit bureaus to correct an entry only to have the creditor reinsert the error in the next reporting cycle. Fixing the problem at the source makes sense.

Credit dispute letter sample

Here is a sample credit dispute letter you can use to address an error with your creditor.

Your name
Account number
Your return address

Date
Company Name
Company address for receipt of direct disputes

Re:  Disputing errors on credit report

Dear Company Name

I am writing to request a correction of the following information that appears on my Equifax, Experian, and TransUnion consumer report:

• Account Number or other information to identify account:

Insert account number or other information such as account holder names and past addresses. This is important if you have had multiple accounts with the same company.

• Dates associated with item being disputed:

Insert the date that appears on your report. This helps ensure that the company identifies the correct account and indicates what you’re disputing.  You can still file a dispute if you don’t have this date.

• Explanation of item being disputed:

Insert a detailed explanation of why the information is inaccurate.  Here are some examples of problems a consumer might want to correct. Pick one, if it applies, or explain the problem in your words.

• The report shows I currently owe money to your company that I have already repaid. (Give details about when you paid, and attach a copy of any proof that you have).
• The date of the first delinquency on my report is not accurate.( Give details about delinquency status, including payment history.)
• My student loan shows a period of delinquency when I was actually in an income-driven repayment plan. (Provide documentation, including copies of your billing statements.)
• I’m the victim of identity theft and I don’t recognize one or more of the accounts on my report. (You may wish to include a copy of the FTC identity theft affidavit describing the identity theft.)
• Other (Describe what is wrong with the report. You may include copies of any additional supporting documentation that you have.)

I have attached a copy of my report with the accounts in question circled.  

Thank you for your assistance.

Sincerely,

Your name

What is a goodwill letter?

If you have excellent credit, one late payment can seriously harm your credit score. However, a well-written goodwill letter might get you off the hook and reverse that damage. A goodwill letter is one that you write to a creditor when you have messed up.

There are five elements in a goodwill letter:

• Remind your creditor of what a good customer you are — how long you’ve had your account and that you have an excellent track record with your payments.
• Explain why your payment was delayed that month.
• Apologize for paying late.
• Nicely ask them to please report your payment as on time.
• Promise to never pay late again.

Remember that the employee reading your letter is busy and has heard it all. So keep it short and respectful, avoid long, drawn-out excuses and admit your mistakes. Don’t just copy and paste this one — make it personal, and use the proper title (and if you know it, the name) of the person who will read it.

There is a lot at stake, so make an effort.

Goodwill letter sample

Date
Creditor name

Creditor address

Re: Account number: XXXXXXXXX

Dear Creditor representative (title or name),

Thank you for taking time to read this letter. I’ve enjoyed my relationship with Creditor name since Year account was opened. 

I’m writing because I noticed your company reported a late payment in Date of late payment on my credit reports. I am requesting a goodwill adjustment to remove this late payment from my TransUnion, Experian and Equifax credit reports.

After reviewing my records, I realize that I did indeed miss the payment deadline. Unfortunately, (Explain why you missed the payment.) I take full responsibility for the mistake. I apologize and have made sure it won’t happen again. As you can see from my payment history, I’ve made every payment on time both before and after the late payment.

If you could make this goodwill adjustment, I believe it will significantly help me protect my credit score and save me unnecessary costs in the future.

Thank you for your time and consideration.

Sincerely,

Signature
Printed name
Address

What is a pay-for-delete letter?

A pay-for-delete letter can be a solution if one of your debts goes into collection. It’s a written request to remove a collection account from your credit report in exchange for partial or full payment of the debt.

Most experts recommend that you don’t admit to owing the money. That’s in case your letter doesn’t work and you have to negotiate a different solution or defend yourself in court. Acknowledging that you owe a debt also resets the clock on the statutes of limitations for debt. That means if your debt is so old that it’s uncollectible, or close to being uncollectible, admitting that you owe it makes it brand new again.

Pay-for-delete letter sample

Your name
Your address
Collection agency’s name
Collection agency address

Date

Account Number: XXXXXXXXXXX

Original Creditor: creditor name

Amount as Listed on Credit Report: $XXXX.XX

Dear Creditor Name,

The purpose of this letter is to offer your credit department a one-time opportunity to settle the alleged amount owed. I do not acknowledge any liability for this debt in any form and I retain my right to request a full and complete debt validation from your company. 

I am willing to pay $XXX.XX of this account if you agree to the following: 

• Your company will delete all references to this account from my credit profile at the three major credit reporting agencies.
• Your company will accept this payment to satisfy the debt in full.
• You will make no mention of this agreement to outside third parties.

If the above-mentioned items are met, I am willing to make payment on this debt. 

I require your written agreement to these terms on company letterhead and signed by a representative who is authorized to enter into such agreements.

I look forward to your response.

You can contact me through any of the following methods.

Your E-Mail Address

Your Phone Number

Sincerely,

Your Name

Do pay-for-delete letters work?

Pay-for-delete letters don’t always work because collection agencies sign agreements with credit bureaus saying that they won’t remove collection accounts simply because they have been paid. So many have a policy of not agreeing to pay-for-delete schemes. But others do because they want to get paid.

That said, you may not need a pay-for-delete letter to wipe away the effect of a collection on your credit score. The latest credit scoring models, FICO 9 and 10 and VantageScore 3.0, do not take paid collection accounts into consideration when determining your credit score. However, you might want to use a letter if you plan to offer less than the full balance owed.

Sesame Grade and Sesame Ring

Credit plays a significant role in our lives and influences access to credit cards and loans, the terms of those loans, and even the ability to rent an apartment or secure a job. It is one thing to understand this, but how to manage it? Credit monitoring services can be valuable and provide consumers with regular updates on their credit scores and reports.

You can see your credit picture at a glance with Sesame Ring. The unique user interface enables easy and intuitive review of TransUnion data. Credit report information from all three bureaus is available if you choose to upgrade to Premium. In addition to data and information, the app provides a measure of overall credit health with your Sesame Grade, and provides alerts, personalized action plans and AI-driven customer support. As you embark on your journey of credit and financial health improvement, knowledge is your most potent asset. Insights from all three bureaus can help you make sound financial choices, negotiate from a position of strength, and nurture your credit health. Regular reviews enable you to maintain accuracy, detect discrepancies and shape your financial future with confidence. Remember that credit is a tool that, when used wisely, can open doors to financial opportunities.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Four credit management letters you can use appeared first on Credit Sesame.

As inflation ravages consumer budgets and thwarts retailers’ marketing efforts, Buy Now Pay Later (BNPL) schemes have become ubiquitous, especially online. While this popular payment option has tremendous value for retailers, it can be problematic for consumers, especially the most vulnerable.

How does BNPL work?

Retailers offer BNPL at checkout, mainly to online customers. Consumers can opt to pay for their purchases over time, usually interest-free, by making several installments.

While retailers offer the service, they don’t provide it. That’s done by BNPL lenders, which charge merchants steep fees (4%-9%, averaging about 6%). So BNPL is really a personal loan supplied by a lender to the merchant’s customer. Most providers offer loan amounts of $50 to $1,000.

With a BNPL, the customer makes a down payment–often 25% of the purchase price–and pays off the balance over time in equal installments. Typical plans require four installments due either monthly or every two weeks.

BNPL lenders generally perform a “soft pull” of the buyer’s credit, and some don’t check credit at all. It’s much easier and quicker to be approved for a BNPL arrangement than for a credit card. According to the CFPB, about 75% of applicants are approved for BNPL purchases.

Usually, consumers pay no interest or fees as long as they make their BNPL payments on time. If they pay late, however, they can incur interest charges (rates up to 30%) and/or late fees. BNPL loans are much less-regulated than credit cards.

BNPL lenders don’t often report the loans to credit bureaus, mainly because the industry doesn’t feel credit bureaus are equipped to treat BNPL loans in a way that helps rather than harms customer credit scores.

Why retailers love BNPL

It costs merchants about twice as much to offer BNPL than it does to accept credit card payments, so why do they do this? Consumers at checkout have already decided to buy the item, so why would a seller increase its fees after making the sale?

Because they have not yet in fact made the sale. Fully 70% of online customers exit their purchase at checkout (and mobile users pull out of 85% of purchases!). Retailers call this costly behavior “cart abandonment” and, understandably, devote a great deal of effort toward reducing those numbers.

For retailers, offering BNPL has tremendous advantages:

• 20% more website visits convert to sales
• The average order increases by 87%
• Promotion of their businesses by BNPL lenders

Some retailers have reported 40% higher sales after adding BNPL to their stores.

Most common reason for using Buy Now Pay Later

What types of purchases does BNPL facilitate most? Necessities? Impulse buys?

According to finmasters, consumers who use BNPL reported purchasing the following items:

• Clothing (50%)
• Electronics (33%)
• Shoes (29%)
• Home decor (25%)
• Accessories (22%)
• Beauty products (21%)
• Jewelry (19%)
• Sports equipment (9%)
• Toys (9%)
• Travel (9%)
• Books (8%)
• Event tickets (7%)
• Other (7%)

Most people would probably classify the majority of these items as “wants” rather than “needs.”

But the story changed in 2023. In January and February, groceries’ share of BNPL orders spiked by 40%, while electronics fell by 14%. Mostly younger, poorer Americans became increasingly more likely to use BNPL for food and household necessities.

BNPL advantages for consumers

There are some good reasons for consumers to consider BNPL instead of credit cards or other alternatives.

Easier approval

Consumers who don’t qualify for credit cards have an easier time getting approved for such arrangements. About three-quarters of BNPL applications are approved, while those with fair credit have credit card approval rates of just 20% to 40%.

Cheaper financing

According to the CFPB, Buy Now Pay Later borrowers have lower credit scores than consumers who don’t use BNPL, 580-669 vs 670-739. Because people with lower credit scores pay higher interest rates, Buy Now Pay Later loans with no interest are an attractive alternative for these people.

Borrowers can make emergency grocery or household purchases without resorting to risky and expensive alternatives like payday loans or cash advances.

Hassle-free

BNPL applicants don’t hurt their credit by applying because lenders perform only a soft credit check or no credit check at all. And there is no long application and no waiting for a card to come in the mail. They can use it right away for their purchase.

Pitfalls of BNPL for consumers

The CFPB has expressed concern over BNPL accounts because Buy Now Pay Later products do not offer protections that are standard for other consumer financial products.

• Lack of standardized cost-of-credit disclosures
• Minimal dispute resolution rights
• Forced opt-in to autopay
• Companies that assess multiple late fees on the same missed payment

Consumers can easily become overextended, illustrated by the fact that 45% of respondents surveyed by The Motley Fool said they chose BNPL to “make a purchase outside of one’s budget.”

The CFPB raised this concern as well, saying, “Buy Now Pay Later is engineered to encourage consumers to purchase more and borrow more. As a result, borrowers can easily end up taking out several loans within a short time frame at multiple lenders or Buy Now Pay Later debts may have effects on other debts.”

Lenders may unknowingly exacerbate this problem and advance more credit than borrowers can afford or should have. “Because most Buy Now Pay Later lenders do not currently furnish data to the major credit reporting companies, both Buy Now Pay Later and other lenders are unaware of the borrower’s current liabilities when making a decision to originate new loans.”

In fact, Buy Now Pay Later borrowers are heavier users of other loan products than non-BNPL borrowers, including store cards (62% vs. 44%), personal loans (32% vs. 13%), and student loans (33% vs.17%).

There are other problems for consumers, especially low-income or inexperienced borrowers. BNPL customers, especially those with multiple loans, can have problems keeping track of their payment due dates. This results in finance charges or late fees. In fact, about 25% of BNPL borrowers end up behind on their payments.

Returns can be problematic with BNPL schemes because the loans don’t always go away when the product is returned. Hassles ensue. The biggest pitfall, however, is that BNPL encourages people to spend more and think less. One C + R Research study found that 57% of BNPL borrowers regretted using the service, mainly because they “spent more than they could afford to pay.”

The future of BNPL

The BNPL industry has enjoyed wild growth in recent years and is poised for more. One big reason is its popularity with young adults who tend to distrust credit cards and prefer something they view as more transparent. The industry is fairly young and many forces are in play.

• BNPL lenders advance money at no cost but pay to borrow it. As interest rates rise, profits are being squeezed.
• Economic downturns can make BNPL loans go very bad very fast. Losses have begun piling up and major players’ stocks have been downgraded.
• Experts anticipate ramped-up regulation of the industry, which increases costs and could slow growth.
• Credit reporting agencies are altering their products to incorporate BNPL into credit scoring models. If lenders start reporting (and it’s possible that they may be forced to, given the concerns of the CFPB), credit-challenged borrowers may use them to build credit in the future. If BNPL balances are reported, lenders have access to better information and are less likely to grant unaffordable loans.
• Demand for BNPL in-store is high, while challenges with POS system integration have slowed adoption by retailers. The service will likely become more common as lenders and retailers work together to meet this challenge.

There is a best-case scenario for using Buy Now Pay Later. BNPL lenders will disclose more. Borrowers will understand their payments, interest rates and penalties before committing to a payment scheme. And with loans being reported to credit bureaus, traditional lenders will be less likely to grant excessive credit to those who can’t afford it. At its best, BNPL is a legitimate competitor to credit cards. At its worst, it’s a trap not unlike payday and title loans that prey on financially marginalized, vulnerable people.

If you enjoyed Using Buy Now Pay Later and how it affects your finances you may like,

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Using Buy Now Pay Later and how it affects your finances appeared first on Credit Sesame.

Your credit score is a significant factor when mortgage lenders underwrite your loan application. While very few mortgage programs exist for homebuyers with credit scores as low as 500, some options may be available to you:

• FHA home loans
• Non-prime loans
• Seller financing
• Hard money loans

We’ll take a closer look at each of these options, their advantages and drawbacks, and how to improve your chances of getting a mortgage with a 500 credit score.

FHA home loans for low credit scores

The Federal Housing Administration (FHA) is a government agency that insures loans made by FHA-approved lenders. The FHA home loan is one of the most popular loan programs for homebuyers with low credit scores. FHA mortgage guidelines allow scores as low as 500 with a 10% down payment. However, very few applicants are approved with a credit score this low.

Your ability to get an FHA mortgage with a 500 credit score depends on the reasons for your poor credit score. If it’s low because you have a limited credit history or high credit usage, you have less trouble than if it’s bad because of serious blemishes like missed payments, collections, charge-offs, bankruptcies, foreclosures or repossessions.

Borrowers should also understand that many FHA lenders apply “overlays” when they underwrite loans. Overlays are guidelines that are stricter than those set by the FHA. For instance, many lenders set their own minimum credit scores between 580 and 640.

FHA compensating factors

For borrowers with credit scores under 580, FHA requires lenders to underwrite the loan manually using a scorecard.

To get an FHA mortgage with a 500 credit score, you probably need exceptional “compensating factors,” to strengthen your application. Here is a list of common compensating factors that FHA underwriters may be able to use to justify approving a mortgage with a 500 credit score:

• Housing expense payments: The borrower has successfully demonstrated the ability to pay housing expenses greater than or equal to the proposed monthly housing expenses over the past 12-24 months.
• Down payment: The borrower makes a large down payment of 10% or higher toward the purchase of the property.
• Accumulated savings: The borrower has demonstrated the ability to accumulate significant savings.
• Conservative use of credit: The borrower does not use credit excessively (this would be reflected in the debt-to-income ratio).
• Substantial cash reserves: The borrower will have, after closing on the home purchase, enough cash to cover at least three months of payments in the event of a financial emergency.
• Additional income: Some income may be available to pay a mortgage but not counted for underwriting. For instance, income from a second job, commissions or bonuses received for less than two years.
• Trailing spouse: A borrower’s spouse’s income is a compensating factor if one borrower moves for a new job and the spouse works but has not yet found a new job.
• Substantial non-taxable income: If a borrower’s income is not taxable, underwriters can adjust the income upward.
• Potential for increased earnings: The borrower can reasonably expect to earn significantly more in the future because of acquired training and experience — for example, a recent medical school graduate.

FHA mortgage pros and cons

The FHA loan offers a few advantages for borrowers with smaller down payments, higher debt-to-income ratios or low credit scores. First, you can use gifted funds for your down payment. Acceptable gifts can come from a family member, employer, or charitable organization. Second, the program allows home sellers to cover some or all of your closing costs. And third, FHA home loans allow you to bring in a non-occupying co-borrower or co-signer to boost your approval chances.

The main drawback to FHA home loans is the mortgage insurance premium (MIP). When you borrow with an FHA mortgage, you incur a 1.75% upfront MIP and an annual MIP of .5% to .7% for 30-year loans with at least 10% down. You can usually wrap the upfront MIP into your mortgage. For a $500,000 loan, the upfront MIP would be $8,750. If you add that to your home loan, your mortgage amount becomes $508,750, and the annual MIP would be .5% per year or $212 per month. However, the MIP on an FHA loan may be cheaper than higher interest rates charged for other types of loans.

Non-prime loans

What used to be called subprime loans are now called “non-QM” mortgages or “non-prime” loans. Non-prime loans are another option for homebuyers with a 500 credit score. Non-prime lenders specialize in providing mortgages to borrowers who don’t qualify for traditional home loans. These lenders charge higher interest rates and fees than traditional lenders, but they are more flexible in their lending criteria.

Non-prime lenders typically require a larger down payment, at least 20-30%. Documentation may be different from a traditional mortgage — for instance, you might be able to prove your income with bank statements instead of tax returns. Non-prime lenders often don’t require a waiting period following a bankruptcy, foreclosure or another serious event.

Non-prime lenders may allow loans with a co-signer or co-borrower. A co-signer agrees to be responsible for the loan if the borrower defaults, while a co-borrower shares the responsibility for the loan and is equally liable for the payments. Having a co-signer or co-borrower with good credit doesn’t make up for bad credit with a traditional loan, but it can help with a non-QM lender.

Non-QM loans are harder to find than FHA mortgages and they are not standardized. A lender can set its own underwriting guidelines as long as they comply with mortgage lending laws. Fees and terms vary widely, so expect to contact many lenders to check their guidelines and compare costs.

Non-prime loan pros and cons

Non-prime lenders often move faster than traditional mortgage lenders. They may allow alternative ways of documenting your income or let you add a co-signer or co-borrower to qualify. Non-QM loans may allow trickier properties like condotels and kit homes or let you use roommate income or short-term rental income to qualify. Most non-prime loans don’t require mortgage insurance.

However, non-prime loans typically have higher interest rates and fees. This can make paying them a challenge and increase your risk of foreclosure.

Seller financing

While not common, some sellers are willing to finance the sale of their homes. Often, they have no mortgage balance to pay off with the proceeds of the sale, and they may prefer a series of payments and some interest income. Your real estate agent may be able to help you find sellers willing to finance your purchase.

Sellers are exempt from most consumer protection laws that lenders must obey, so you need to do your own due diligence. Even though your lender won’t require an appraisal, for instance, you should hire a licensed appraiser to ensure you’re not overpaying for the property. Similarly, you probably want a property inspection to avoid unexpected defects. And it’s smart to have a real estate attorney look over any seller financing agreement for your protection.

Your seller financing may not be a traditional 30-year loan. You might get a five-year term with a balloon payment, for instance. In that case, you must pay off the seller’s loan in five years by refinancing or selling.

Seller financing pros and cons

Seller financing can be a lifesaver, especially if your seller charges lower rates and fees than a mortgage company or private lender. However, sellers who finance understand that your options are limited and can drive a harder bargain — charging more because you can’t negotiate aggressively. They may also push you to forego inspections and an appraisal or charge very high interest rates and fees. And if your loan has a balloon payment, make sure you can refinance or sell if needed.

Hard money loans

“Hard money” lenders are individuals or groups of investors who specialize in expensive, short-term mortgages to nontraditional buyers. Hard money loans are also called “private money” mortgages.

Most hard money buyers are real estate investors like home flippers who borrow and repay money very quickly. However, hard money lenders also make loans to borrowers with poor credit.

Hard money lenders operate under different rules from traditional mortgage lenders. They are less concerned with the borrower’s credit scores because they protect themselves by requiring a larger down payment. This minimizes the chance of losing money if they have to foreclose.

Hard money interest rates and fees

If you borrow using hard money, expect to pay 12% to 25% interest. Your actual rate depends on factors like your credit history, real estate investment experience and the extent of repairs needed to the property. If you have severe derogatory credit history like bankruptcies, foreclosures, judgments, or collections, expect to get an offer on the higher end of the spectrum.

Hard money pros and cons

You may be able to finance with a hard money loan in just days rather than weeks. Hard money is typically used as a bridge loan or for a fast transaction. However, hard money lenders can finance primary residence purchases if they abide by consumer protection laws.

Most hard money lenders, however, do not lend for non-business purchases. If you do finance your home with a hard money loan, exercise caution.

Hard money loans:

• Have much shorter terms, usually anywhere from one to three years. If you cannot qualify to refinance by then, you may have to sell your home or risk losing it to foreclosure.
• Have interest rates and payments that are significantly higher than they’d be with an FHA or other traditional loan. That increases the chance of falling behind on your payments and losing the property.
• Require 25% to 40% down. That’s a lot to lose if you default and end up in foreclosure.

Be careful if planning to get a mortgage with a 500 credit score. Most consumers would be far better off putting off a home purchase until their credit score, income, debts and savings are good enough to qualify them for a traditional mortgage. Credit Sesame’s educational content and credit-builder service can help you accomplish this goal sooner.

Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post How to get a mortgage with a 500 credit score appeared first on Credit Sesame.

You might feel angry, disappointed or embarrassed, but it’s not the end of the world. It’s important to understand that lenders tend to focus on different types of borrowers and turn down people who don’t fit their box. One company might reject you while another begs for your business. The roadmap below shows you how to get over rejection, choose the right lender and put your best foot forward.

Step 1: Read your adverse action notice

Your first step after being denied a loan is to read your “adverse action notice.” The Fair Credit Reporting Act and the Equal Credit Opportunity Act require lenders to issue this notice orally, electronically or in writing when they deny your credit application or offer less favorable terms like a lower loan amount.

By law, adverse action notices must contain this information:

• The name, address and phone number of the credit bureau (including a toll-free number for nationwide agencies) that supplied the report.
• A statement that the credit bureau doesn’t make underwriting decisions and can’t explain why the lender declined your application.
• Notice that you have the right to a free copy of the credit report used if you request it within 60 days.
• Notice of your right to dispute the accuracy or completeness of any information on the credit report.
• Your credit score, if a score was used.

The lender is also required by law to provide the specific reason(s) you were turned down for a loan or explain where to get that information (you must request it within 60 days).

Common reasons for loan denial

Once you understand the reason for your loan denial, you can address it. Here are the top reasons lenders deny credit:

• Poor credit history. If your track record with previous lenders features missed payments, charge-offs, collections or other blemishes, future lenders will be reluctant to trust you.
• Insufficient credit history. While having no history is better than bad history, it’s still a big hurdle to overcome. Lenders can’t predict your future behavior without some past behavior to analyze.
• High debt-to-income ratio. Your debt-to-income ratio (DTI) shows lenders how much of your income is available to repay a new loan. If you already owe more than you can safely repay, you may have difficulty borrowing additional funds.
• Spotty employment history. It takes income to pay bills, and if your earnings are inconsistent, lenders worry that you won’t be able to repay your loans. Lenders like to see stable, consistent, healthy income and not big gaps between jobs, frequent employer or industry changes or income that’s dropping.
• Incomplete or inaccurate application. Lenders can’t make a decision if you don’t complete the application and supply all requested documentation.

Don’t be discouraged. You can address these issues, improve your profile, and probably get loan approval.

Step 2: Fix what you can

Once you know why a lender turned you down, you can work to improve your chances.

Credit report errors

Review your credit report for accuracy and correct errors if needed. Contact the company that reported incorrectly or report the error to the credit reporting agency on its website. If your application is for a mortgage, your lender may be able to help you correct errors very quickly by using a rapid rescoring service.

Application issues

Go through your loan application and make sure that you provided complete and truthful information. Look at your debts. Many times, lenders take the balances and payments right off of your credit report. If the actual balances and payments are lower, document them for your lender. Make sure your income is also calculated correctly.

Employment issues

A spotty work history with gaps and changes raises red flags with lenders. There are a few acceptable reasons for such changes, for example being in school, switching to part-time after having a baby, moving for a spouse’s job, or changing careers after completing your education. You may be able to overcome job instability with a stellar credit history, conservative use of debt, or a healthy emergency fund. If you have had job changes in the last two years, try to tie them together to build a picture of steady work doing a similar job or working in the same industry.

Minimum credit score

If your credit score is the problem, you can (and should) work toward improving it over time. But you should also look for a lender with lower minimum credit score requirements. Check your credit score and ask lenders what their guidelines are before applying. Or seek out lenders that offer a loan prequalification without pulling your credit.

Debt to income

If your issue is debt-to-income, you can fix that by paying down debt, increasing your income (side gig?), or choosing a lender that allows higher ratios.

To calculate your DTI, add up your housing costs (mortgage payment or rent) and your monthly debt payments including credit card minimums, auto loans, student debt, etc. Don’t include living expenses like utilities or food. Divide that total by your monthly before-tax income. To approve you, a conservative lender won’t want your DTI over 36%, an average lender maxes out at 43% and a generous one at 50%.

Step 3: How to get a loan with bad credit or high DTI

Of course, you want to improve your financial management and credit score for future borrowing. But what if you need money now?

Consider non-prime lenders

There are lenders and credit card issuers that specialize in riskier borrowers. They might be willing to accept a lower credit score if your income is sufficient to afford the loan. Some personal loan companies are willing to accept credit scores as low as 580 for otherwise-qualified applicants. Shop carefully for non-prime loans because interest rates and terms vary wildly. Make sure you can afford the payments and that you have a plan for paying off the loan. Missing payments can drag your credit score even lower and get you into more financial trouble.

Pledge collateral

Loans backed by collateral that the lender can take are less risky to lenders. You may be able to get financing by pledging something valuable like real estate, a car, electronics or jewelry. Beware of auto title loans, however. They often have extremely high rates and your balance increases very quickly if you don’t repay it right away. You can even lose your vehicle.

Get a co-borrower or co-signer

If you have loved ones with good credit, you might be able to bring in a co-signer or co-borrower. Lenders consider all applicants’ income and debts, so another borrower can help if your income is low. And adding someone with better credit to the application could get you a better deal.

However, co-signing or co-borrowing can be extremely dangerous for your friend or family member. If you miss a payment, it will likely hurt their credit score. If you default on (don’t pay) your loan, your lender may pursue your loved one for payment, even into court if necessary. Co-signing also creates contingent liability for your cosigner, which means they might have to pay your debt. This can make it harder for them to get credit in the future. If your friend or relative is willing to take this on, cherish them and do not abuse their trust. Such a relationship is worth more than any amount you can borrow.

Does being declined for a loan hurt your credit score?

Being denied credit does not directly harm your credit score. Lenders do not report their underwriting decisions to credit bureaus.

That said, applying for credit triggers a “hard” inquiry when the lender pulls your credit report, and a hard inquiry causes your credit score to drop a few points. So-called “soft” inquiries happen when you check your own credit or prequalify for credit without applying. Soft inquiries don’t harm your credit score.

So, if you apply for loans everywhere and get denied repeatedly, you have a batch of hard inquiries. Statistically, consumers with at least six inquiries are eight times more likely to go bankrupt, so they raise red flags with lenders. It’s smart to prequalify for loans without a hard inquiry or ask lenders what their guidelines are before applying for credit.

How long do inquiries hurt your credit score? They remain on your credit report for two years but only impact your score for 12 months.

Understand that credit bureaus treat inquiries for auto loans and mortgages differently. That’s because you often don’t know what interest rate and terms you may be offered until you apply. And it’s common for consumers to apply with several lenders when shopping for financing. So as long as you do your shopping within a short timeframe (14 to 45 days depending on the scoring model version), your credit score reflects only one inquiry.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Turned down for a loan? Here’s what to do next appeared first on Credit Sesame.

I stared at my screen in disbelief. Why was I declined for a pre-approved loan? Everything seemed to be in my favor:

• Three pre-approved offers
• FICO scores that consistently hovered around 800
• ZERO debt and an 8% credit utilization ratio
• A healthy income, more than enough to qualify

And yet, there was the dreaded popup: “So sorry, we can’t approve you for a loan at this time. You can apply again in 90 days.”

What could possibly have happened? In the interest of full disclosure, I didn’t plan to apply for a personal loan and did not need one. I was writing a lender review for a financial publisher and needed to include information about the application process. So, I was working through the prequalification process, which wasn’t supposed to generate a hard credit inquiry. When three “pre-approved” offers popped up, I clicked on one to see what its fees were. And bang! Immediate popup declining my loan application. Followed shortly by an “adverse action” email. Eek.

As I didn’t want a loan, being declined didn’t really matter. But it stung — no one likes rejection even by a bot. And I was mystified: how could someone as highly qualified as I was be declined for a pre-approved loan?

What I did right to increase my credit score 100 points

In the last 12 months, I increased my credit score by over 100 points by applying carefully for credit and then not using it much. I put one automatic charge, like a streaming service, on each card. And I set them all up with automatic monthly payments, so I created a lot of positive credit history very quickly.

In addition, I collected a ton of airline miles in the process and drove my credit utilization ratio down to almost nothing. Since credit utilization is 30% of a credit score, it helped me make spectacular credit score leaps very quickly. I fully expected to qualify for any loan I wanted (or didn’t want).

Why I was declined for a pre-approved loan

My fatal credit mistake was easy to make. The one credit card that I use for air miles only has a $5,000 limit and I charge my rent and everything I buy on that card. Of course, I pay it off each month. But when I accidentally applied for my personal loan, that card was maxed out. And even if my total credit utilization was under 8%, the utilization on that card was close to 100%. And that, combined with the fact that I had six credit cards (“too many revolving accounts”) was enough to derail my application. Ugh.

How many credit cards is too many?

Then, there is the other reason my loan was declined — too many revolving accounts. But how many revolving accounts is too many? Turns out that the number of accounts probably wasn’t the main issue. The speed with which I opened them was. In my quest to have lots of unused available credit, which did great things for my credit scores, I accidentally created a red flag parade for future lenders.

Opening up a slew of new credit cards over a short period drops the average age of accounts, impacting 10% of your credit score. It also generates “hard” credit inquiries, which show up on your credit report. Having a ton of available credit, especially new credit, can scare lenders.

Mortgage underwriting and new credit cards

According to Freddie Mac’s Selling Guide, underwriters should view the opening of several new accounts with concern.

“…several recently opened accounts may be a warning that the Borrower could become overextended and require a more conservative approach to reviewing both Borrower credit reputation and capacity. A credit history with all recently opened accounts may indicate that the Borrower lacks sufficient experience managing financial obligations.

The [lender] should also review the age of accounts to determine if there has been a significant change in the Borrower’s credit profile. A change in the Borrower’s pattern of credit use, which includes several newly opened revolving accounts, several inquiries and high utilization of revolving Tradelines, introduces significant layering of risk to the Borrower’s credit reputation.”

How to use rewards cards without penalty

While I don’t plan to apply for any loans in the near future, I have taken steps to protect my credit while still maximizing my mileage rewards. It’s simple. I check my card activity and balance online every Monday. And I pay it in full from my checking account. Every single week. If I use it for an especially expensive purchase, like plane tickets or an appliance, I log in immediately and pay the balance. My credit score is up another 20 points.

Another way to guard against the overutilization of one card is to spread out purchases. If you’re chasing rewards, you could use one card that provides the most cash back on gas and groceries for those purchases and another one for travel, etc. Experts recommend keeping utilization on any single card under 30% to avoid ugly surprises when you apply for credit in the future.

The balancing act

Do I regret opening up several new credit cards in one shot? Not really. The end result has been a greatly-improved credit score. But had I been applying for a loan in earnest, my errors could have proven costly. It’s smart to consider all possible credit effects before applying for new credit, closing an account or increasing your balance.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Declined for a pre-approved loan: my fatal mistake appeared first on Credit Sesame.

The three Rs in education are Reading, wRiting and aRithmetic. Most people agree that those basic skills are necessary for life. What about money management? Knowing how to spend, borrow, save and invest wisely. It could be argued that financial knowledge is as important as the three Rs. Since April 2023 is Financial Literacy Month, it’s a good time to discuss why financial literacy should be taught in schools.

Why financial literacy as a 4th basic skill?

Why do we need to improve our financial literacy? Because in the US, financial ignorance is taking a terrible toll, and financial problems tend to spill into other parts of life. Researchers reported in the Journal of Marriage and Family that money stress often leads to health problems, emotional issues and poor marital relationships.

Poor credit ratings

Being uneducated about money is linked to lower credit scores, and failure to build credit can deny families home-buying opportunities. Harvard University’s Joint Center for Housing Studies claims that homeownership is the most reliable way to build wealth and that the average homeowner’s wealth is 40 times that of the average renter.

In addition, consumers without good credit pay much more for everything they finance, including autos, homes, credit card balances, and education. Credit card rates for people with excellent credit run about 10% lower than those with fair or poor credit (just under 19% vs nearly 29% as of March 2023). When families spend more on financing costs, less money is available for savings or other purchases.

Student loan balances

Researchers at Old Dominion University surveyed over 1,000 grads and most said they were unprepared for the impact of their loans and wished that they had received “more financial literacy” during the college decision process and at college orientations. “I had no idea what I was getting myself into at the age of 18 signing all those forms for financial aid,” one grad said ruefully.

Today, it takes students who finance college education an average of 21 years to repay their student loan balances. The difficulty in repaying their loans completely blindsides many grads because they don’t know how much the accruing interest will increase their balances. In addition, students often choose degrees without considering their earning potential or even if they can successfully complete the program. It is clear why financial literacy may be useful before enrolling at college and taking out a loan.

Financial insecurity

According to a recent LendingClub survey, two-thirds of Americans lived paycheck to paycheck in 2022. And nearly three-fourths of those consumers experienced difficulty just covering their bills. Living paycheck to paycheck means nothing is left over after paying your living expenses. In addition, half of Americans have under $500 in an emergency fund. This is far less than the three months of living expenses recommended by experts.

Spending without a budget or emergency savings leaves households vulnerable to unexpected costs or hiccups in their income. In the NPR article Paycheck-To-Paycheck Nation: Why Even Americans With Higher Income Struggle With Bills, exasperated consumer Rhonda Alvarez said, “I make decent money now, and I shouldn’t have to live paycheck to paycheck.” Rhonda also said that she wished schools would teach children money management. “It’s way more important sometimes than algebra or geometry.”

Excess debt

People without much financial knowledge are more likely to experience excessive debt loads, credit problems and bankruptcy. Getting a grasp as to why financial literacy is important may help to avoid these basic financial mistakes.

On the other hand, studies have shown that financially literate consumers are less likely to have credit card debt and more likely to pay off their balances each month. They also refinance their mortgages when it makes sense to do so to minimize interest expense. In addition, financially savvy adults avoid borrowing against their 401(k) plans and are less likely to resort to expensive loans from payday lenders, pawn shops and auto title lenders.

Unprepared for retirement

A recent McKinsey study found that 80% of Americans are financially unprepared for retirement. That’s a serious problem because those who fail to save for retirement may depend on Social Security payments to survive, and the average Social Security check in 2022 was $1,656.30.

Why would so many be setting themselves up for poverty once they stop working?

Theresa Ghilarducci, professor of economic policy analysis at The New School for Social Research in New York, claims few of us have the financial literacy needed to retire successfully under our current system. “The U.S. is the only industrial country that depends on untrained individuals supplementing their own basic Social Security and long-term savings with a system of voluntary contributions and retail investment products,: she said. “It’s like requiring everyone to do their own home electrical wiring and dental work.”

American retirement is unlikely to change in the near term, so future generations need a better understanding of how savings, investing, and compounding interest work. The sooner, the better, since the earlier you start, the easier it is to save enough for a secure retirement.

Understanding why financial literacy is important

Financial literacy means acquiring these important basic financial skills, which may be considered life skills.

• Establish a savings habit.
• Avoid unnecessary debt.
• Create and stick to a budget.
• Borrow wisely when necessary.
• Establish and protect a good credit rating.
• Plan for retirement.
• Invest correctly for different life stages.
• Insure against catastrophic losses.

Studies have shown that students with higher financial literacy are less likely to incur late fees, use payday loans or make only the minimum payments on their credit cards. And states that have deployed financial literacy programs are getting good results. For instance, within three years, Georgia, Idaho and Texas saw credit scores rise and delinquency rates fall. These are good reasons why financial literacy should be part of a high school, or even younger, curriculum.

Financial literacy coursework

What should be taught in a high school financial literacy class? The Federal Reserve Bank has developed this standard personal finance curriculum for older students. Our kids should know these things, and so should we.

Unit 1: Decision making

• Lesson 1.1: The Art of Decision making
• Lesson 1.2: Opportunity Cost
• Lesson 1.3: Making Choices and Identifying Costs

Unit 2: Earning Income

• Lesson 2.1: It’s Your Paycheck: Invest in Yourself
• Lesson 2.2: Investing in Yourself
• Lesson 2.3: Teaching Human Capital and the Importance of Postsecondary Education
• Lesson 2.4: What Are Taxes For?
• Lesson 2.5: Understanding Taxes
• Lesson 2.6: It’s Your Paycheck: “W” Is for Wages, W-4, and W-2
• Lesson 2.7: Individual Income Tax: The Basics and New Changes

Unit 3: Buying Goods and Services

• Lesson 3.1: Making a Budget—It’s All Spending
• Lesson 3.2: Budget Trade-Offs—A Penny Here and a Penny There
• Lesson 3.3: Big Spenders
• Lesson 3.4: Smart Phones and Budget Changes
• Lesson 3.5: Advertising: Dollars and Decisions

Unit 4: Saving

• Lesson 4.1: Time Preference—Why It Is Hard to Save
• Lesson 4.2: Simple and Compound Interest—Why It Is Great to Save
• Lesson 4.3: Time Value of Money
• Lesson 4.4: No-Frills Money Skills: Growing Money

Unit 5: Using Credit

• Lesson 5.1: The Three Cs of Credit
• Lesson 5.2: Evaluating the Benefits and Costs of Credit
• Lesson 5.3: Credit Bureaus: The Record Keepers
• Lesson 5.4: Cards, Cars, and Currency: The Car Deal Package
• Lesson 5.5: Bankruptcy: When All Else Fails
• Lesson 5.6: On the Move: Renting Basics
• Lesson 5.7: Fast Cash and Payday Loans

Unit 6: Financial Investing

• Lesson 6.1: Meeting Financial Goals—Rate of Return
• Lesson 6.2: Managing Risk—Time and Diversification
• Lesson 6.3: Evaluating Investment Options
• Lesson 6.4: No-Frills Money Skills: Get Into Stocks
• Lesson 6.5: Diversification and Risk
• Lesson 6.6: No-Frills Money Skills: Understanding Bonds

Unit 7: Protecting and Insuring

• Lesson 7.1: Insurance: Coverage and Cost Basics
• Lesson 7.2: Is Insurance Worth Buying?
• Lesson 7.3: The Three Ds of Identity Theft

Parents can take control now

While only about one-third of students have access to financial literacy content at school, parents don’t have to wait to help their kids. The FDIC has created financial literacy coursework that you can download for every grade from K through 12.

Here’s an example of a budgeting activity a parent can do with kids in the third through fifth grade:

“Ask your child to save your grocery store receipts for a week. At the end of the week, to help with the family budget, have your child add up how much money was spent on food.

Discuss ideas to save money on future food shopping trips to meet budget goals. You can also
invite your child to collect the receipts for a longer period of time (several weeks or months) to keep
track of progress toward goals. Check in regularly to discuss as a family.”

That exercise seems like it would be good for most adults as well.

The good news is that with the right personal finance skills, most people can build a decent credit score, learn to budget, avoid excess debt and save for retirement. With the right tools, you can live better today and enjoy more security tomorrow.

If you enjoyed Beyond the 3 Rs: Why financial literacy should be a 4th basic skill you may like,

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Beyond the 3 Rs: Why financial literacy should be a 4th basic skill appeared first on Credit Sesame.

What is Equal Pay Day?

Equal Pay Day is on March 14th this year, 2023. The date symbolizes how far into the year women must work to catch up to men’s income from the previous year. This day supporting equal pay is always on a Tuesday to show that women must work an extra two days into the following week to catch up to what men earned the previous week.

The National Committee on Pay Equity created this day in 1996 and called it National Pay Inequity Awareness Day. Its purpose is to educate the public about the gap between men’s and women’s wages. Today, the organization asks everyone to wear red on Equal Pay Day to symbolize how far women and minorities are “in the red” on payday.  

How unequal pay affects everyone

Earning less for the same work puts people at a disadvantage, and women in the US are 35% more likely than men to live in poverty. It’s harder to fund an emergency savings account when you earn less. Without savings, you’re more likely to take on debt when your expenses increase or your income suffers. Debt can easily cause a financial spiral when your income barely covers necessities.

It doesn’t get any easier for women in retirement. According to the Brookings Institution, average women’s Social Security benefits are just 80% of men’s. And data from Vanguard show that the average women’s retirement account balance is just two-thirds of the average man’s.

Why the gender pay gap still exists

There are many reasons for the gender pay gap, and not all relate to discrimination.

• Women tend to leave the workforce for extended periods of time to care for their children or elderly parents. This reduces their lifetime earnings significantly and also impairs career advancement and the additional compensation that goes with it.
• Similarly, women tend to cluster into jobs and occupations that offer more flexibility but lower pay. Those jobs enable them to meet their household responsibilities more easily but may cost hundreds of thousands in lost lifetime earnings.
• Workplace discrimination is an issue and the perpetrators may not even be aware of it. Unconscious bias means decision-makers may believe that men make better leaders or are more proficient with technical jobs than women. This leads to unconscious discrimination in hiring, pay and promotion.
• The lack of transparency in compensation helps keep women’s pay down. The National Womens Law Center claims that studies show that increasing wage transparency closes wage gaps between men and women.

While some of the wage gap stems from the preferences of many women in the workforce, not all of it does. The US Department of Labor claims that even in female-dominated fields, men are paid more. And that when women enter any field at a higher rate, wages in that career drop. And according to the University of Minnesota’s Gender Policy Report, 85% of the wage gap results from differences in pay within the same occupation and not because women choose certain careers.

Gender pay inequality by race, identity and age

While women earn 83% of what men earn, the gender pay gap is not equal across the board. For every dollar earned by white men, for instance:

• White women earn 79 cents
• Hispanic women earn 58 cents
• Black women earn 63 cents

There may also be unequal pay for LGBTQ+ workers. The Human Rights Campaign says that their research showed LGBTQ+ workers earned 90% of every dollar earned by the “average worker.” However, they acknowledged that both genders were present in each group and that we don’t yet understand the impact of being an LGBTQ+ woman on wages.

The disparity between male and female wages also varies by age. Women earn less than men of the same age.

• 16 to 24 years women earn 82.91%
• 25 to 34 years women earn 87.53%
• 35 to 44 years women earn 84.21%
• 45 to 54 years women earn 76.90%
• 65 years and up women earn 76.52%

The impact of childbearing and years out of the workforce can be seen in the years in which women return to the workforce. The penalty for leaving work for an extended time during prime working years can be severe. However, the numbers might also illustrate a less-equal environment for women in the past and a better one for younger women today.

Overcoming the gender pay gap

There are some aspects of the gender pay gap that come down to choices women make:

• The average pay in a given career
• The number of hours or years women choose to work
• How successfully women negotiate pay and promotions

If women want to earn more, they may have to commit to a less fulfilling or flexible career. They may have to work longer hours. And they may have to be more educated and assertive when negotiating pay or promotions.

However, American culture, government policy, unconscious bias, and overt discrimination from employers are clearly culprits as well. That’s demonstrated when pay in a profession declines as more women choose it. And when men earn more than women even in female-dominated careers.

So how can you get the pay you deserve in the workplace?

• Research your career choices carefully. The Bureau of Labor Economics (BLS) maintains a website and database of career information. You can look up earnings by people at different stages in that career and in various regions of the country. You can see the education level required, typical working conditions and if the industry is growing, shrinking or stable. Choose an occupation that meets your requirements for pay and lifestyle.
• Do your homework before salary negotiations. It’s not hard to discover online what people with your qualifications in your position earn. Arm yourself with facts and figures and documentation. Many women tend to underestimate their worth, says The New York Times, so steel yourself for negotiation and don’t settle for less.
• Understand that you may have to switch employers or industries to get your desired salary.
• If you want to earn top dollar, understand that sacrifice may be necessary. BLS data indicate that men work on average 8.4 hours daily while women average 7.8 hours.

Women should also prepare carefully for their financial future. Put retirement savings on autopilot by taking advantage of workplace plans and directing money from each paycheck to a 401(k), IRA or another plan. Avoid unnecessary debt and protect your credit rating to minimize borrowing costs. If your earnings are lower, you must be more mindful of where they are going.

Supporting equal pay for equal work

Much of systemic inequality stems from the fact that women still shoulder most of the child-rearing responsibilities and a disproportionate amount of household tasks; about two hours a day more than men, according to a report by Oxfam and the Institute for Women’s Policy Research. Women perform the bulk of unpaid but necessary work in their households. If you want more time and energy for work, there must be a better division of labor in the home. Or a family can buy time by hiring others to complete household tasks.

Another driver of workplace fairness is government. Electing leaders who make supporting women and families a priority is key, like these policies:

• Raise the minimum wage and the tipped minimum wage. Women make up a large proportion of the lowest-paid workers. Raising the minimum wage would provide an immediate earnings increase to 15 million women.
• Increase pay transparency. New state laws requiring employers to disclose the salary range for positions and national proposals like the Paycheck Fairness Act (which failed in Congress due to Republican opposition) could help reduce the gender wage gap by prohibiting retaliation against employees who disclose their wages and increasing penalties for wage discrimination. Voting for leaders who support equal pay is voting for your own bank account.
• Improve access to child care. When childcare costs absorb much of a mother’s income, it can make more sense for her to drop out of the workforce, doing long-term damage to her career prospects and her future social security income.
• Push employers to fix pay disparities. Because bias can be unconscious, unequal pay can result by accident. Employers need to conduct pay audits and make corrections when men and women are not being compensated fairly.

Unequal pay in the workplace hurts everyone, especially families. The wage gap can be narrowed by supporting employers that pay fairly and politicians that prioritize fairness for all regardless of gender, age or identity.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Equal Pay Day and your personal finances appeared first on Credit Sesame.

March is National Women’s History Month and a perfect time to observe prominent women who influenced the American financial landscape. While achieving wealth and distinction through their own efforts, these extraordinary women also battled for women’s financial rights.

Here are the stories of how they overcame challenges and made their marks, and what we can learn from their tactics.

Victoria Woodhull, the First Lady of Wall Street

Victoria Woodhull (1838–1927) was the first woman to own a brokerage firm on Wall Street. She was also the first woman to start a weekly newspaper. Victoria agitated for women’s suffrage, equal education and labor reform. In 1872, she ran for President of the United States for the Equal Rights Party.

Victoria reportedly had spiritual gifts and fortune-telling abilities that her family relied on for their income. She spent her childhood traveling with them, selling medicines and telling fortunes. This ability would serve her well in the future. Railroad magnate Cornelius Vanderbilt hired Victoria as a medium to contact his late wife. She also used her abilities to help him pick stocks. Vanderbilt helped her by backing her personal investments and eventually, she was able to open her own Wall Street firm, earning over $700,000 ($12 million today).

Ms. Woodhull used her money and influence to start a weekly newspaper. She ran stories exposing financial fraud and espousing the idea that women could live as men’s equals at work, at home and in politics.

What can we learn today from Victoria Woodhull?

That even without a financial background, we can use our strengths and contacts to gain financial knowledge and make investments. And even if we’ve not been taught much about saving and investing, it’s crucial to get out of our comfort zone and make regular deposits for our future. Victoria Woodhull also used her money to promote women’s rights and educate citizens about equality. If we want to improve the financial climate for the next generation of women, we must also make our voices heard.

Sarah Breedlove, the first female self-made millionnaire

Sarah Breedlove (1867–1919), aka Madam C.J. Walker, founded a line of hair care products for African American women. She parlayed her considerable sales income into many successful real estate investments, eventually becoming one of America’s first self-made female millionaires.

Ms. Breedlove’s path wasn’t an easy one. She was born to freed slaves in Louisiana, and was orphaned, married, a mother and widowed by the age of twenty. She moved to Missouri to escape grinding poverty, supporting her daughter by working as a washerwoman. Eventually, Sarah went to work for Annie Turnbo Malone, selling shampoos and hair-pressing irons. After learning everything she needed to know about the business, Breedlove began making her own pomades and shampoos. Ultimately, Sarah hired and trained a 3,000-person commissioned salesforce for her highly-profitable business.

Ms. Breedlove never stopped learning, even taking courses in public speaking and penmanship. She used her money for good, eagerly embracing philanthropy and supporting a number of causes, including the newly-formed NAACP.

What can we learn from Sarah Breedlove?

That if you can’t get ahead where you are–in your career, your town or your personal life–move where you can. And to impress employers with your work ethic and talent, to learn from them and better yourself. Without the drive to learn and the courage to act on what she learned, Sarah Breedlove might have remained a washerwoman instead of becoming a wealthy and influential pioneer.

Muriel Seibert, a trailblazer on the New York Stock Exchange

Muriel “Miki” Seibert (1928–2013) was the first woman to purchase a seat on the New York Stock Exchange (NYSE). Seibert attended college in Ohio but had to leave after just two years because her father fell ill. Siebert eventually moved to New York City and began her career as a $65-a-week research assistant. In the years that followed, she took other positions with various brokerages but left each one after discovering that her male colleagues were being paid much more.

In her autobiography Changing the Rules, Muriel wrote, “I had a dream of earning the same pay as my male colleagues. So I asked a friend what large firm would pay me equally, and he said that the only way it could happen was if I bought my own seat on the New York Stock Exchange.” It took years for her to convince an NYSE member to sponsor her and to line up financing. She also paid a record-setting $445,000 in 1967. In 1975, Siebert transformed her company into the nation’s first discount brokerage. Seibert is the oldest American discount brokerage and thrives today.

Siebert served as the Superintendent of Banking for the State of New York from 1977 to 1982–a stormy time of rising interest rates and teetering banks. Not one New York bank failed during her tenure. “I tell you, there’s poetic justice in things,” she told the Los Angeles Times. “I regulated the bank that wouldn’t write the letter to guarantee my NYSE seat loan.”

What can we learn today from Muriel Seibert?

To understand our worth in the marketplace, and not settle for anything less. It’s sad that even today, gender-based wage discrimination exists. However, transparency in the workplace has increased since Seibert’s day, and it’s not difficult to research wages on career sites like Glassdoor and Indeed. When we establish a track record of excellent work and understand our value in the market, we don’t have to take no for an answer.

Francis Perkins, the woman behind Social Security

Frances Perkins (1880–1965) was an American activist appointed as Secretary of Labor under President Franklin D. Roosevelt from 1933 to 1945. This makes her the first female cabinet member in the US. She assisted President Roosevelt with his high-priority social reform and projects, including establishing Social Security, a 40-hour workweek and the minimum wage.

When Frances graduated from Mount Holyoke College in 1902, her path seemed laid out–live at home with her parents until a suitable marriage prospect arrived while volunteering or perhaps teaching. But reading materials about slums and the conditions of the working class changed Frances, and she made social work her vocation. She returned to school and earned a master’s degree in economics and sociology from Columbia in 1910. On graduation, she became the Executive Secretary of the New York City Consumers League, learning to lobby for social justice and beginning her career in public enterprise.

Ms. Perkins was a vigorous advocate for women’s rights, and she fought for equal pay for women and for the protection of women in the workplace. This is how she described her mission: “I came to Washington to work for God, FDR, and the millions of forgotten, plain common workingmen.”

What can we learn from Frances Perkins today?

As women, we have benefitted from her activism and her achievements. Since most minimum wage earners are female, income support at the bottom is crucial in closing the gender wage gap. However, women have still not conquered all workplace inequality. And we won’t without building on Frances Perkin’s efforts. It’s important, then, to notice inequity and do what we can; standing up for co-workers, refusing to accept unfairness in the workplace, or perhaps running for office. In Frances Perkins’ own words, “I had to do something about unnecessary hazards to life, unnecessary poverty. It was sort of up to me.”

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

The post Highlighting women in finance during National Women’s History Month appeared first on Credit Sesame.