Credit Risk: What Is It and Do Employees Have It?
Put simply, credit risk is the risk a lender takes when they loan money to a borrower. Makes sense. You wouldn’t let someone you don’t know borrow your car or stay overnight in your home without vetting them first.
However, evaluating credit risk of a borrower can come with a lot of gray areas that can negatively impact a borrower’s chance at the best loan rates and terms…
Why Credit Risk Can Limit Options
A borrower’s credit risk will directly impact their ability to obtain a loan as many traditional lenders will decline loans to those with no credit score or a poor credit score. Interestingly enough, around 26 million Americans are deemed “credit invisible”, meaning they don’t have a credit score and may not actually be able to access loans at all.
There are three main reasons that borrowers are typically considered to be “credit invisible”:
- They’ve never had a credit account
- A credit account was only recently opened under their name
- The accounts they do have go unused for long periods of time
Even with all the potential downsides that come with credit risk, some borrowers choose to fall back on options that are less than beneficial to their overall financial health.
Borrowers Typically Fall Back on Risky Alternatives
The most popular risky alternative is a payday loan.
These high-interest loan options are appealing to borrowers who find themselves in desperate times and in quick need of money. 12 million Americans take a payday loan each year and the borrower’s average income is about $30,000 a year. With an average annual percentage rate (APR) of about 400%, it is easy to see why payday loans are a double-edged sword.
Most payday loans are actually advertised as being helpful for unexpected or emergency expenses, but 7 in 10 borrowers use them for regular and recurring expenses such as rent. As expenses come up and employees turn to predatory lending for a quick buck, they are leaving themselves more financially vulnerable than before and will sometimes end up in an unending cycle of debt.
This is due to the fact that most borrowers end up renewing or reborrowing the initial loans. In fact, about 80 percent of payday loans are taken out within two weeks of the repayment of a previous payday loan.
When your employees are desperate, predatory loan options can be far more appealing but have detrimental impacts to their financial health.
The Impact Credit Risk Can Have on Your Employees’ Financial Health
As financial emergencies arise, borrowers, many of them your employees, may feel encouraged to turn to payday loans which will negatively impact both their financial and personal wellbeing.
Did you know that money is the number one stressor in the United States? 90% of individuals say that it has a direct impact on their stress levels. On top of that, over 40%of individuals reported they wish they could have a fresh financial start.
The recent pandemic has only further highlighted the need for financial assistance. Before the onset of Covid-19, only about a third of employees admitted their personal finance matters were a distraction at work. Now, however, nearly 60% stated they feel it is more important than ever for employers to offer financial wellness benefits. Additionally, 53% mentioned that they would feel less stressed about their overall financial situations if they had some form of financial wellbeing benefit.
Does Covid-19 Change Employees’ Credit Risk?
The pandemic has led to a level of uncertainty in society and credit scores have become somewhat ambiguous as payments have been missed and the security of employment has wavered.
In a survey of 1,200 people conducted in July of 2020, TrueConnect discovered some telling statistics about current financial health among employees:
- Nearly 50%of employees have new and unexpected expenses at home
- 41% had a spouse impacted by Covid-19 which affected finances
- Over the next six months, 72%of employees anticipate needing additional financial help due to the pandemic
It is clear now, more than ever, that the pandemic is having a detrimental impact on employees’ financial and personal wellbeing, which may only be made worse by a downward trending credit score due to a lack of support.
How You Can Help Your Employees Improve Their Credit Risk
Employers are able to eliminate the need for high-interest loans and can promote a strong employee financial wellbeing by offering their employees the option to participate in a financial wellness program.
TrueConnect is a financial wellness benefit that exists to eliminate the need for employees’ to turn to payday loans during a financial crisis, while simultaneously building their credit up. TrueConnect allows employees to access small-dollar loans with no credit check required. Some of the largest benefits are each repayment is reported to the three credit bureaus, repayments are repaid through automatic payroll deductions, there is no cost on the employer to implement the program, and free financial counseling is available to improve financial education.
Setting up a financial wellness program is the first step towards improving your employees’ financial wellbeing by giving them options that will not become detrimental to their overall credit score.
Want to learn more about TrueConnect’s approach to financial wellbeing?