Savings can also be a cause of stress

Reading a story today on CityAm* about a recent survey conducted by Equiniti on employees and their saving habits; few things stood out.

Just under half (46 percent) of workers want their employers to offer them financial education, while a similar proportion (49 per cent) feel their workplaces could do more to help them make informed savings and investment choices. 58 per cent of savers and investors are not putting away as much money as they would like, with a fifth (19 per cent) saying this is because they are not sure of where best to invest their hard earned cash next.

“…It’s in the employers’ interest, it helps build loyalty and mitigate financial stress …” normally one would think that having some savings should relieve stress, not cause it. A lot of companies, when they think of financial stress and employees being in distress think of employees who are prone to fall prey to payday lenders or have an unsustainable balance on their credit cards. The savers are thought of as people who are financially prudent and hence need no help.

According to a recent post by Daily Mail*, “Millions of customers with savings accounts in Britain are already suffering from historically low returns, with many popular savings accounts paying close to zero.” Financial Conduct Authority has also named and shamed few banks and Post Office as having easy access accounts that in some circumstances pay no interest. Many banks have been criticised for so-called ‘teaser rates’ which lure customers before slashing back the benefits once the cash has been deposited”.Long term financial education and investments through company share plans are good but the employers also need to look at short and medium term savings of their employees. Money that is being saved for Christmas shopping, a big purchase, a holiday or for a rainy day unexpected expense. Having this money

Long term financial education and investments through company share plans are good but the employers also need to look at short and medium term savings of their employees. Money that is being saved for Christmas shopping, a big purchase, a holiday or for a rainy day unexpected expense. Having this money sit in a zero interest zombie bank account isn’t the only option.

Credit Unions are the original P2P (peer 2 peer) Finance companies since the time P2P Finance or the social economy weren’t fancy terms. Members savings are not just protected under the FSCS (just like a bank) but they earn dividends on their deposits at the end of the year. Unlike saving account interest rates of banks, the dividends are not fixed or reduced by the credit unions. It is directly linked to the money the credit union earns by lending to its members.

So it is a win-win situation – you save when you don’t need the money, withdraw when you need it. If you need more than you have saved, then you can borrow from the credit union itself and help yourself and other members earn dividends from the money you borrow. Member helps member, the social economy at its original best.

FairQuid runs the tech platform where you can connect your employees to your local credit union and instil long-term financially behaviour change. Start now

*CityAm article

*DailyMail article

Credit Scores: does the past predict the future?

Credit scores were designed to measure the risk of default by taking into account various factors in a person’s financial history. These factors can be grouped into the following categories below (the percentages are the weights contributing to the FICO score*, the predominant credit score in the US). The credit reference agencies in the UK also follow a very similar model of scoring.
• payment history (35%)
• debt burden (30%)
• length of credit history (5%)
• types of credit used in the past (10%)
• recent searches for credit (10%)
• other, e.g. recently opened account, credit cards, etc. (10%)
*source: Wikipedia

Does the Past predict the Future?
The underlying popular maxim that the financial world seems to be going by is “The best predictor of future behaviour is… past behaviour”. The problem with this approach is that, a large majority of folks (non prime as they would be referred to) find themselves in a classic chicken and egg situation with seemingly no way out.

You will get credit or get credit at a reasonable rate of interest when your credit score improves. But how does one improve their credit scores if it is based on events that have happened in the past? One is supposed to build credit scores by taking out new credit and building a pattern of timely and full repayments. But with low credit scores most of the credit available for this purpose is at a very high rate of interest that is not sustainable for them….Hence the chicken and egg cycle continue worsening their scores further.

Employment as indicator of good credit.
While credit bureaus are trying to perfectly measure the credit worthiness by only looking at the historical payment patterns of an individual, they miss out on adding any variables that can help predict future behaviour independent of the past mistakes. There seems to be no second chances in the institutional finance world. FairQuid believes that there are a few important underlying factors, like employment history, income and expense pattern analysis beyond the standard ratios and job performance of the applicants (HR data around performance ratings and appraisal/promotion frequency). These additional employment factors explain someone’s ability to repay a loan in a timely manner and their overall future financial strength potential much better.

While steadily building up an intoxicated credit file during the crises times, a large segment of the society falls prey to payday lenders who are leveraging on the psychology by keeping the borrowers in their debt circle. The so called “lender sharks” are lending small ticket cash to survive until the next week and charging sky-high interests for this “weekend” cash.

All credit bureau scoring systems rely on previous credit histories and changes in personal details such as address of the borrower. How would they capture the risk to lending someone who just got employed in a new town, changed their address and want deliberately to come out of their financial debt circle? Or being trapped in an expensive debt spiral during the times of uncertainty, unemployment and personal crises like divorce?

FairQuid’s mission.
FairQuid’s mission is to challenge the toxic lending practices and make credit available for employees, by making their hard work and job performance count for them. The size of the income is only one aspect of the character of the employees, other qualitative measures such as length of service at the current employer, recent promotion and a bonus at the end of the year would also be a strong indicator about someone’s financial credibility.