Will Macro Pressures and ‘FICO Creep’ Be a Boon for Pay Later Options?

Monday (March 10) marked another bloodletting on Wall Street, another slew of headlines about tariffs and trade wars. And as economic concerns mount, the picture on consumer debt becomes cloudier.

PYMNTS reported recently that data from the Federal Reserve revealed overall credit increased $18.1 billion during the first month of the year. Revolving debt was up by $9 billion. Nonrevolving debt, which includes auto loans, was up by about $9 billion, as measured month over month — and that follows a massive $18.9 billion surge in December.

The normalized pace still represents an “addition” to the overall monthly obligations.

As reported here last month, the Fed’s latest data on delinquencies — with an eye on consolidated debt — showed gains at the end of last year, with 3.6% of outstanding debt in some stage of delinquency. As of the end of the fourth quarter, credit cards continued to be the loan type with the highest share of balance 90+ days delinquent, at 11.35%. This share grew 2% quarterly and 17% year over year.

Looking Toward FICO Creep

We may be headed into an age of “FICO creep,” where two things happen: The macroeconomic, exogenous shocks render the traditional tiers of credit scoring less reliable as a predictor of repayment behavior. And at the same time, there may be some slippage of those tiers, as super-prime consumers move toward prime status, prime consumers flirt with subprime status … you get the picture.

At the end of last year, Experian noted that the average FICO score was 715, and that may be fluid amid the pressures and uncertainty. Indeed, PYMNTS Intelligence has found that 19% of consumers surveyed have indicated that they had reached card limits at least once in the past year.

And in the Fed’s latest survey of its district banks in the Beige Book, several respondents reported that consumer spending was declining and in some cases banks were pulling back on lending. The pressures are not coming from card loans. Earlier this month, Fitch Ratings said that the share of subprime auto borrowers who were at least 60 days delinquent on their payments climbed to 6.6%, a record level.

Who Benefits?

PYMNTS Intelligence indicated that among several credit profiles, there are about 63 million borrowers in the credit “marginalized” population, the vast majority of those with FICO scores spanning the 750 and below threshold (and more than 50% below 650). Experian has said that about 30% of U.S. consumers have FICO scores below 650 and are thus subprime.

If — in an increasingly rocky macro environment, that would be “when” — banks tighten lending, and repayments are stretched, we’d see that aforementioned creep.  The credit marginalized populations would swell, and 29% of subprime, about 19% and 12.4% of super-prime consumers have already been denied at least on credit card application in the past year.

Cash flow pressures would give tailwind to paying over time, especially with buy now, pay later (BNPL) options. BNPL is popular, particularly among consumers facing financial difficulties. According to PYMNTS Intelligence research accessible here,  consumers who frequently encounter cash flow problems are 3.5 times more likely to use BNPL, with 8.9% of these consumers using it in the past 30 days, compared to just 2.5% of those without the same pressures.