Subprime Borrowers Seek Strategies to Improve Their Credit Scores

The pressures of mounting card debt, still-high interest rates and tightening underwriting threaten to expand the ranks of subprime borrowers — all the while making it harder for those consumers to improve their credit standings.

In the report “Subprime Borrowers Flock to Alternative Options Due to High Credit Card Denial Rates,” we found that borrowers with FICO scores of 620 or less have higher denial rates than seen with other cohorts of borrowers.

The Vicious Cycle

There’s a vicious cycle here, where banks, the traditional lenders, have found that traditional risk-scoring metrics are less adept at determining where or when to extend credit.

That, in turn, limits the credit cards or other types of loans available to those would-be borrowers. And then, of course, without those loans or credit products in hand, with a paydown history attached to them, it becomes harder for those subprime consumers to boost their credit scores, which then improves credit access.

Twenty-nine percent of subprime consumers have applied for and been denied a credit card, compared to 12% of super-prime consumers.

And yet, PYMNTS Intelligence has found that subprime consumers are willing – and have been trying – to find new ways to improve their credit. The attack is two-pronged, where these same consumers are using the credit they do have to manage how they pay for essential goods and services, and satisfy those obligations.

Who Has Access — and Who Doesn’t

Of the more than 2,300 consumers that we surveyed earlier in the year, the data shows that 57% percent of subprime borrowers have access to credit cards, and 21% use them to make essential purchases to improve their credit score.

That leaves a gap, given the fact that 43% of this segment does not have access to the traditional lines of credit. But one-quarter of consumers with low credit scores use credit for nonessential expenses with the specific intent of raising their credit score. As for the action of adding purchases to the cards, and paying them down, we found that subprime borrowers are 30% more likely than consumers with high credit scores to use credit on nonessential items specifically to raise their credit score.

There’s evidence that enlarging the pool of debt types that are used to calculate credit scores (and for providers and issuers, expanding their actual range of loan offerings) may have a beneficial effect.

In one example, we found that subprime are more likely to have applied for loans and buy now, pay later (BNPL). For instance, 40% of subprime borrowers have applied for BNPL, compared to 27% of super-prime consumers. Moreover, subprime consumers are 2.1 times more likely to have applied for a payday or credit-builder loan than those with higher credit scores.

For the issuer and the lenders, the long-term benefits should be apparent in the fact that subprime borrowers are 3.6 times more likely to show interest in getting a new credit card than those with the highest credit scores. While 12% of subprime consumers report interest in obtaining a new credit card, just 3.2% of super-prime borrowers say the same.

The lower echelons of credit-rated consumers also state that they are interested in personal loans and auto loans, which would further deepen their relationships with banks. FIs would be well-advised to develop strategies for serving the subprime market responsibly with secured credit cards and other credit-building instruments that appeal to subprime individuals.