Financial Wellness

The dangers of viewing credit cards as an alternative to emergency savings

In an emergency credit cards are better than nothing — but they can carry high risks.
credit cards on a hook

As some employers are rehiring, others in certain states are scaling back again, and many workers are forced to continue enduring reduced and unpredictable work hours. A June report from the U.S. Bureau of Labor Statistics showed that 10.6 million people are employed part time “for economic reasons,” meaning these are people who would prefer to work full time, but their “hours had been reduced or they were unable to find full-time jobs.” This number is up by 6.3 million since February.

Of these nearly 11 million people who aren’t working as much as they need to, over two-thirds (78%) fear they will be unable to make ends meet during the pandemic and just under half (47%) reporting they have less than $1,000 available in savings. When in this situation, some people are forced to take out payday loans or fall back on credit cards. But while credit cards are often a better choice than payday loans, they can still become sand traps of debt that are extremely difficult to overcome.

The good news is that, as an employer, you are in a strong position to help your employees find better solutions. In fact, you can create them.

Credit cards can come with their own set of problems

For a large percentage of Americans, an everyday thing like a flat tire can spell personal financial disaster. In these times, credit can serve as a lifeline for those that may not have the necessary cash on hand. Unfortunately, credit cards, although typically better than payday loans, can pose similar risks to consumers when terms, rates, or personal circumstances are not favorable. Low introductory interest rates can be a tempting lure for those in need of quick cash, but once the introductory rate ends, some people may find themselves in a financial lurch. An introductory interest rate of 0% can quickly jump to 23.99%, creating the cyclical debt for those that are unable to pay off their credit cards before the introductory period ends.

Even moderate interest rates on credit cards can prove harmful. Let’s say a bartender named Sam commutes to work and needs to get the head gasket on her car replaced. Sam doesn’t have the $1,000 needed available in savings, and using a credit card seems like a decent option. If Sam’s credit card has an APR of 18% and she is able to make the minimum payment each month, after one year, she will be paying $175 in interest alone — and still owe $946 on the initial purchase. This situation gets especially complex in times like these, where unforeseen circumstances (like a pandemic) render Sam under-employed and unable to make even the minimum payments on the card.

Having emergency savings is the better solution

Building savings is difficult, and payday loans and credit cards may seem like an acceptable “if I ever end up in that spot” solution. The problem is that 40% of Americans — even ones who are fully employed, and making high incomes — can’t cover a $400 emergency. Prior to the pandemic, 69% reported they had less than $1,000 in savings. So for most of our nation’s workforce, it’s not about if an emergency will happen — it’s about when.

When people are reduced to using credit cards in these situations, they may be robbed of autonomy and control over their future if repayments, fees, and changing terms become unmanageable, especially during trying economic times or circumstances. Short-term savings leads to long-term financial security because it helps people weather financial surprises while also avoiding the cyclical debt that can come with credit cards or payday loans.

When people are empowered to manage emergencies by tapping their own resources, they are better equipped to make progress toward longer-term financial goals like buying a house, earning a degree, or retiring. This idea is so well studied and backed by data, that it’s the basis of the work for experts such as Commonwealth, Duke University’s Common Cents Lab, and the Financial Health Network — all members of BlackRock’s Savings Initiative. The unanimous consensus is that having emergency savings is the necessary foundation for long-term financial health

As an employer, you’re well positioned to help

Offering financial wellness benefits that help your people avoid predatory financial products and build stronger lives is the right thing to do. Beyond that, it will help you attract and retain the best talent, and enjoy strong business performance in the long run. Helping your workers build savings is the critical first step to helping them build life-long financial wellness.

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