Benefits and Compensation, Coronavirus (COVID-19)

Bad Debt Happens to Good People

A recent survey revealed that 59% of American credit card holders—110 million Americans—were in credit card debt before COVID-19. And it wasn’t frivolous spending. Twenty-six percent said that day-to-day expenses like groceries, child care, or utility payments were the biggest factors in their debt balances.


Source: David Sacks / DigitalVision / Getty

Not All Debt Is Bad

Good debt is generally considered low-interest debt that helps you increase your net worth, ultimately helping you improve your financial position at a reasonable cost. This could include student loan debt, a home mortgage, a vehicle loan, or a small business loan.

But bad debt is bad, expensive, and usually unnecessary. It puts a strain on your financial situation, especially when used to finance discretionary (avoidable) expenses like vacations, costly electronics, or fancy dining experiences. Even good debt with high or variable interest rates that isn’t managed appropriately can turn into bad debt.

However, Not All Bad Debt Is Intentional

Let’s say you had to use your credit card to get you through the month of child care, intending to pay the credit card balance in full. Out of nowhere comes COVID-19, and your situation changes. You find yourself unable to pay the balance off in full, and your temporary debt quickly turns into expensive, bad debt.

An unexpected turn of events like COVID-19 is what makes an individual’s financial situation unpredictable. This unpredictability is the primary reason financial wellness services exist. It is imperative to be prepared, to have a plan, and to have resources to fall back on should something unexpected like COVID-19 happen.

The term “rainy-day fund” is appropriately named because when it rains, it pours. Without financial resources and services to help your employees navigate challenging situations, good debt can turn bad. And good people with good intentions may turn to bad debt when they feel there isn’t a better alternative.

Preparation Is the Best Protection During Uncertain Times, But What Can Your Employees Do NOW?

Individuals who didn’t have an emergency fund to fall back on are undoubtedly feeling the effects. Employers offering a financial wellness benefit would serve their employees well by sharing information on tools and resources within the program that would best support employees right now.

Of value would be budgeting tools, financial calculators, financial coaching, and savings programs. It’s never too late to start saving, and there are many seemingly small budgetary adjustments that will add up. Given recent lifestyle changes that are outside of our control, employees have the opportunity to assess what they were spending before the COVID-19 crisis and determine if there are areas they can rein in as we adjust to a new normal.

Unfortunately, during trying times like these, employees must remain diligently aware of scammers trying to take advantage of the situation. People should remain vigilant and be aware of phishing attacks that occur via e-mail and phone. It is imperative to remain calm and thoughtful and not quickly provide information before assessing what is being requested or from whom. Sharing examples of various fraud and phishing methods with your employees will help them reduce their risk of identity theft, especially as more government-funded programs become available.

Payment relief programs, student loan forbearance, tax filing and payment deferral, balance transfer options, and personal loan debt consolidation are all viable solutions for your employees right now. Encourage your employees to research the options available to them, given their unique financial situations, and explore the most effective ways to avoid taking on bad debt.

Financial institutions, credit card issuers, financial wellness partners, utility companies, etc., are here to help. Assistance programs have been developed specifically for individuals affected by the COVID-19 pandemic, offering various solutions from forbearance plans to waived fees to paused payments. If your employees reach out to these institutions and vendors to explain their situation, they will likely be met with empathy and options to help them regain or maintain financial stability.

This is an unprecedented situation we’re faced with. It’s encouraging to see businesses, vendors, and employees working together to help ensure we all come out of this crisis together stronger. It takes an entire organization to succeed, but it starts with you as an organizational leader. You must use all resources available to help your employees and your business navigate the COVID-19 crisis. We are all in this together.

David Kilby is a personal finance expert and president of FinFit, a fintech company that provides over 125,000 employers with a unique financial wellness benefit platform.

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