Financial Wellness

Navigating the post-holiday financial crunch: a business's role in reducing consumer debt

Discover proven strategies to assist your customers in managing debt and boosting their credit scores, fostering financial stability and success.

The holidays have passed, leaving behind a trail of festivities and, unfortunately for many Americans, substantial credit card debt. As we step into the new year, it's not just individuals grappling with these financial burdens; businesses, too, find themselves at a crucial juncture with a unique opportunity to aid their customers in this fiscal challenge.

In this article, we explore how businesses can play a role in helping consumers reduce debt and improve credit scores.

The surging tide of credit card debt

The landscape of consumer debt has seen a dramatic shift recently. Following a brief respite during the Covid-19 pandemic, credit card debt in the U.S. has soared to new peaks.

The latest figures from the US Federal Reserve paint a stark picture: a total credit card debt of US$1.029 trillion as of the end of 2023, marking a 9.8% jump from the previous year.

More concerning is the rising delinquency rate, which has nearly doubled since Q3 2021, reaching 2.98% in Q3 2023. The average debt per cardholder now stands at US$6,993. With the average Annual Percentage Rate (APR) hovering around 21.19%, it's easy to see how unpaid balances can spiral out of control, casting a long shadow over future financial well-being.

According to LendingTree, the average card debt among cardholders in Q3 2023 was US$6,993, and most people do not pay their credit card debt in full. With an average APR of 21.19%, unpaid credit card balances can quickly skyrocket, leaving many helpless and unsure of how to proceed.

These individuals may also see their credit scores decline, affecting not only their present but also their future financial health. Credit scores are critical for assuming loans, such as mortgages, auto loans, renting housing, cell phone deals, utility deposits, and more.

Why this matters for businesses

Traditionally, issues like credit card debt and credit scores have been seen as personal matters. However, businesses, especially those in the realms of banking, retail, and financial services, are increasingly recognizing the wider impact. High levels of household debt can stifle consumer spending, a key driver of economic growth, and even signal impending financial crises and recessions.

Addressing consumer debt isn't just about mitigating economic risks; it presents an opportunity for businesses to enhance their customer relations. By providing tools and strategies for debt management and reduction, businesses can demonstrate a commitment to their customers' overall well-being. This approach can lead to several positive outcomes:

  1. Enhanced Customer Loyalty and Trust: When a business helps customers manage their finances better, it builds trust and loyalty. This deepened relationship can translate into repeat business, referrals, and a strong brand reputation.
  2. Increased Customer Engagement: Offering financial management tools creates more touchpoints with customers. Engaged customers are more likely to explore and use other products or services offered by the business.
  3. Long-Term Customer Financial Health: By aiding in debt reduction, businesses contribute to the long-term financial health of their customers. Financially secure customers are more likely to make sustainable purchasing decisions, benefiting businesses in the long run.
  4. Differentiation in a Competitive Market: Providing financial wellness tools can set a business apart in a crowded market. It's an innovative way to add value to the customer experience, going beyond traditional product or service offerings.
  5. Social Responsibility and Positive Brand Image: There's a growing expectation for businesses to play a role in addressing societal challenges. Helping with debt management can enhance a company's image as a socially responsible entity, appealing to a customer base that values corporate citizenship.

Innovative strategies in debt reduction

The financial sector, particularly digital banks and fintech firms, is leading the charge in offering creative debt reduction solutions. Take, for instance, KOHO, a Canadian digital bank. Their unique credit-building service provides users with an unsecured credit line and manages their payments, thus helping improve credit scores efficiently and without the need for collateral.

Embedded finance is another arena offering new possibilities. It allows even non-financial companies to integrate financial services, opening up avenues like 'rounding programs'. In these programs, everyday transactions are rounded up to the nearest dollar, with the difference earmarked for debt repayment. This simple, yet effective strategy can significantly contribute to debt reduction over time.

By enrolling in a rounding program, users can roundup daily transactions: the daily $3.50 cup of coffee becomes a $0.50 roundup. On average, users can roundup about $30 every month. These roundups can be contributed towards various goals, such as investing, saving, big purchases or debt reduction. This can be a particularly impactful tool for users who find it difficult to make higher than minimum payments, a key strategy when reducing debt.

Another innovative approach is cashback rewards, or rather, cashforward.

Users can enroll in a cashback rewards programs, whereby they earn cashback with participating merchants. By specifying cashforward, the reward amounts can be automatically forwarded toward debt payment, further increasing monthly payments above the minimum and accelerating debt repayments.

A win-win for businesses and their customers

These emerging solutions underline the significant role businesses can play in helping consumers manage debt and improve credit scores. For businesses, this isn't just about corporate responsibility; it's a strategic move towards building a more financially healthy customer base, which in turn, is beneficial for the businesses themselves.

As we navigate the complexities of post-holiday debt, the role of businesses in this landscape is becoming more crucial and beneficial. By adopting and promoting innovative financial tools and services, businesses can aid their customers in not just weathering the post-holiday financial storm but also in setting a course for a more secure financial future.

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