25% of Subprime Consumers Use Credit for Nonessentials to Improve Credit Score

Contrary to perceptions of financial irresponsibility, a significant portion of subprime borrowers actively and strategically use credit to improve their financial standing, revealing an underserved market segment with a strong desire for traditional financial inclusion. It’s one of the insights drawn from the recent PYMNTS report “High Credit Card Denial Rates Force Subprime Borrowers to Turn to Alternative Options.”

Navigating the current consumer credit environment presents considerable challenges for individuals classified as subprime borrowers, typically defined by credit scores below 620. These consumers face significant barriers to accessing conventional credit products. Traditional banks are often ill-equipped to underwrite this segment. As a result, subprime applicants encounter substantially higher denial rates for traditional products like credit cards. Specifically, bank denial rates for subprime credit card applicants are 2.3 times higher than those for super-prime borrowers, with 29% of subprime consumers reporting being denied a credit card compared to just 12% of super-prime consumers. This limited access to traditional financial services compels many subprime borrowers to seek alternative lending options.

Subprime borrowers are increasingly turning to nontraditional avenues such as payday loans, credit-builder loans and buy now, pay later (BNPL) services to cover essential purchases and bridge cash flow gaps. They apply for loans and BNPL at higher rates than other consumers; for instance, 40% of subprime borrowers have applied for BNPL compared to 27% of super-prime consumers, and they are 2.1 times more likely to have applied for a payday or credit-builder loan than those with higher credit scores. While these alternatives offer accessibility, often with lower denial rates than traditional cards (e.g., 14% for BNPL, 8.2% for payday loans for subprime applicants), they frequently carry high interest rates and fees that can further strain these borrowers. And the effectiveness of some alternative credit providers for building credit is limited, as not all report consumer behavior to the major credit bureaus. Despite these hurdles and the reliance on alternative products, obtaining traditional credit remains a crucial financial milestone for subprime borrowers.

Key data points from the report underscore the dynamics at play:

Denial rates for traditional credit card products are 2.3 times higher for subprime applicants compared to super-prime borrowers.

One-quarter of subprime consumers use credit for nonessential expenses with the specific intent of raising their credit score.

Subprime borrowers are 3.6 times more likely to show interest in obtaining a new credit card than those with the highest credit scores.

The findings highlight that subprime borrowers represent an underserved market actively seeking ways to improve their creditworthiness and integrate into the mainstream financial system. Beyond credit cards, this segment expresses greater interest in securing various types of loans, including personal loans, mortgages and auto loans, indicating a broad aspiration for the benefits offered by traditional finance. Their interest in debt consolidation loans is also notably higher than that of high-credit score consumers.

This dynamic underscores a significant opportunity for financial institutions to develop more inclusive and responsible strategies to serve this market segment. Products such as secured credit cards, which mitigate lender risk while providing a pathway for credit building, are identified as potential tools to help subprime borrowers achieve their goal of traditional credit access and financial stability. This analysis is based on insights from a survey of 2,330 U.S. consumers conducted in January of this year.