If you can’t afford to pay a bill or an unexpected expense, what do you do? With nearly half of Australians living paycheck to paycheck, this question is, unfortunately, all too common. The first port of call for many people in this situation is an emergency savings account. However, if they haven’t had the luxury of establishing one or choose not to access it, they will need to look elsewhere. A common alternative is to rely on credit, specifically credit cards. They’re typically easily accessible and give short term relief to a cash shortage. However, are they really the best solution for the millions of Australians that find themselves in this situation?
Credit Cards Have Their Downsides
Credit cards can help people with insufficient cash on hand to avoid personal financial disasters in the short run. Although they still pose significant financial risks to consumers with terms and fees that do not favour those who are most vulnerable. For example, almost all credit cards come with introductory offers designed to lure in new customers. Banks may waive fees and interest for a certain period after a customer signs up. While this may work well for a while, suddenly the interest rate spikes to 21.99%. This change often catches out those who were unable to get on top of their debt during the honeymoon period.
Even without excessive interest rates, credit cards can become dangerous. Let’s look at a simple example. You’re leaving to drive to work in the morning and your car breaks down. After calling for help, you’re hit with a $1200 bill! Not having the cash in your account, you reach for the credit card. The card has an annual percentage rate of 18%, meaning that if you were to just make the minimum monthly payments for the next year, you’d be stung with $210 in interest. Worse yet, you’d still have $1135 outstanding!
Clearly, credit cards are not a good idea if you can’t pay them off fast. Worse yet, recent events have led to increased economic uncertainty, making it unclear if people will have a job to go to. If someone loses their job, it may be difficult even to meet the minimum card repayments – risking a seriously harmful financial situation.
Emergency Savings are a Far Better Option
Saving towards a goal, such as homeownership or a holiday is often more motivating than putting aside money for a rainy day. Nonetheless, it’s probably even more important! Building sufficient savings can be difficult, especially if you’re just making it by, making credit cards and other loans seem to be a reasonable back-up option.
This thinking becomes problematic when we consider the scale of the savings problem. Reports from ME Bank found that 25% of Australian households had less than $1,000 in liquid savings with other surveys finding a similar proportion having no savings at all. This is not a small number of people – a quarter of the population has no autonomy to deal with even minor emergencies on their own terms.
Credit cards are relied on more often, and by many more people than most of us realise. These people often become tied to their credit card, unable to control their future as fees, interest, and altered card terms spiral out of hand. Even a moderate level of short-term savings helps a person’s longer-term financial wellbeing as they can meet unexpected costs with their own money, avoiding the traps that come hand-in-hand with credit cards. Getting on top of immediate challenges by building sufficient savings empowers a person to achieve more significant financial milestones, such as purchasing a house, car or eventually, retiring!
Employers Can Help Their Staff Avoid the Pitfalls of Credit
While financial wellness is a person’s own responsibility, employers have tools to help their workers out. Often, your staff turn to credit cards or other dangerous financial products because they’re short of cash until their next payday. What if there was a way to offer your employees a way to access their earned wages before payday easily?
Mobile apps like Paytime help those in your workforce who need money before payday. It allows them to access their earned wages whenever they want, for a small charge less than the cost of a cup of coffee. Paytime is a great tool to establish financial wellness in your employees and reduce financial stress by equipping them with the means to cover any emergencies that may come their way. Accessing wages via Paytime is not a loan – your staff are merely withdrawing a portion of the wages that they’ve already earned, before their regular payday!
If your company wants to empower your employees to make smarter financial decisions (such as avoiding harmful credit cards) by enabling flexible on-demand access to their earned wages, contact Paytime today!
