Charging things to a credit card and paying the balances over time is no longer optimal — perhaps no longer even feasible if you’re paying the minimum every month.
Balances balloon as interest rates kick in, as high as 23% or more. The simple math gives a sense of the pressures: $100 becomes $123 owed at the end of the year, all other things being equal.
Credit card debt is nearing levels that had been seen in advance of the pandemic. However, we’re in a markedly different economic scenario nowadays, and data shows that paycheck-to-paycheck consumers are three times more likely than others to take on credit card debt.
The average credit score for all paycheck-to-paycheck consumers is 664, more than 90 points below the average for consumers not living paycheck to paycheck. As a result, they’re a bit more likely to find that traditional credit is a slippery slope.
They borrow more, the debt becomes more onerous, payments are missed and credit scores decline. The vicious cycle becomes even more pronounced when inflation is in the mix, as it most certainly is now, because we all must triage expenses. In the triaging, the credit card expense may trail behind paying the rent or buying groceries.
There are any number of firms that are leveraging digital platforms, and advanced analytics, to help individuals and families grapple with that debt — in some cases by rolling that debt into personal loans.
LendingClub is a prominent example here. The company has said in recent earnings results that its consumer loan business continues to gain traction. The company’s personal loan book grew by 19% in the most recent period. Overall consumer marketplace originations, as detailed in the most recent supplemental materials, were up 29% to $2.8 billion.
Through the platform model and a multi-pronged approach that includes digital banking and cross-pollination of products and services, FinTech-related core revenues stood at 59% of the top line, with banking-related revenues accounting for the remaining 41%.
Management noted that delinquency rates across the entire servicing portfolio remain below pre-pandemic levels.
In recent weeks, we’ve seen news that Tally, which offers an automated debt paydown system, has received $80 million in Series D funding. Through the company’s offerings, eligible customers are offered a new line of credit at lower interest rates.
Providers have also been enabling FinTechs and enterprises to tackle credit in more measured ways. Over the summer, embedded finance platform Bond announced its Credit Builder Card, which makes it easier for FinTechs and other companies to introduce a secured credit card to their customers.
Bond CEO and co-founder Roy Ng told PYMNTS in an interview that close to 35% of Americans have subprime credit scores — between 580 to 669 — or credit files that are thin or nonexistent.
“We’re not talking about a small sliver of people here. This is a fairly large population facing this issue every day. On top of that, 40% of subprime scores are represented by millennials,” he said. Bond partnered with Bloom Credit and all payments paid with Bond’s Credit Builder Card will be reported to traditional credit agencies.
The credit crunch that looms may be tempered a bit through the use of data to help tailor debt paydown to match individual circumstances — and emerge with a better state of financial health.