High Credit Card Denial Rates Force Subprime Borrowers to Turn to Alternative Options

Navigating the current consumer financial landscape is difficult for subprime credit applications and subprime borrowing. To an extent, it varies widely depending on credit scores, with subprime borrowers facing significant barriers to traditional credit access. These individuals, typically classified as having credit scores less than 620, navigate a financial system that often views them as high-risk borrowers. As a result, they’re denied access to traditional forms of credit — despite the accompanying higher interest and capacity to repay lower dollar amounts over time.

Despite these challenges, subprime borrowers actively seek ways to improve their credit standing. Many use available credit strategically, making essential and nonessential purchases to demonstrate responsible financial behavior. Others turn to alternative forms of credit. The results are mixed. Not all alternative credit providers report to the credit bureaus, so attempts to build a responsible credit track record can be invisible to traditional lenders.

Meanwhile, traditional banks are ill-equipped to underwrite subprime consumers. These borrowers will gravitate to payday loans, credit-builder loans and buy now, pay later (BNPL) services as they seek credit to pay for essential purchases and ease cash flow gaps.

Yet, access to traditional credit remains a major milestone for subprime borrowers. Despite systemic barriers preventing subprime borrowers from meeting this goal, the desire to improve credit standing and obtain a credit card or secure a loan is significantly higher among this group.

These are just some of the findings detailed in “Subprime Borrowers Flock to Alternative Options Due to High Credit Card Denial Rate,” a PYMNTS Intelligence exclusive report. This edition examines subprime borrowers’ use of traditional and nontraditional credit products to improve their credit scores. It draws on insights from a survey of 2,330 United States consumers conducted from Jan. 14 to Jan. 23.

• Subprime borrowers use credit cards to improve their credit profile
• Higher denial rates drive subprime borrowers to credit alternatives
• Subprime borrowers see access to traditional credit as a financial goal
• Read More
• Methodology

Subprime borrowers use credit cards to improve their credit profile

Fifty-seven percent of subprime borrowers have access to credit cards, and 21% use them to make essential purchases to improve their credit score.

Contrary to the perception that subprime borrowers are financially irresponsible, a significant portion proactively attempts to improve their credit standing. Data shows that 57% of subprime borrowers have access to credit cards. Among these consumers, 21% specifically use their credit lines to make essential purchases to improve their credit score. Many of these borrowers seek to establish a positive credit history by making timely payments and keeping their balances low, aiming to build their financial credibility gradually.

A notable trend among subprime borrowers is their tendency to use credit for nonessential purchases at a higher rate than their prime and super-prime counterparts. In fact, one-quarter of consumers with low credit scores use credit for nonessential expenses with the specific intent of raising their credit score. Furthermore, consumers with low credit scores are reportedly 30% more likely than consumers with high credit scores to use credit on nonessential items specifically to raise their credit score. This suggests a broader understanding of credit utilization as a tool for credit improvement, extending beyond just essential needs.

Higher denial rates drive subprime borrowers to credit alternatives

Subprime borrowers currently seek and use alternative credit options at higher rates, as denial rates are 2.3 times higher for traditional products.

Subprime borrowers frequently encounter obstacles when applying for traditional credit products like credit cards. For one, bank denial rates for subprime applicants are 2.3 times higher for credit cards than those for super-prime borrowers, making it significantly more challenging for these consumers to secure conventional credit lines. In fact, data shows that 29% of subprime consumers have applied for and been denied a credit card, compared to 12% of super-prime consumers.

With limited access to traditional financial services, many subprime borrowers turn to alternative lending options. Among them are payday loans, credit-builder loans and other nontraditional financial services that consumers can use to secure necessary funds. The appeal of these alternative options lies in their accessibility, with subprime borrowers reporting lower denial rates compared to traditional credit cards. For instance, providers denied 14% of subprime applicants a BNPL loan and 8.2% a payday loan. Yet, subprime borrowers have higher denial rates than super-prime consumers across most credit products, highlighting the challenges subprime borrowers face in accessing credit.

Subprime borrowers are an underserved market.

In general, consumers with lower credit scores are trying to access traditional credit products, such as credit and store cards, at rates similar to other consumers. Still, they are more likely to have applied for loans and 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. This reliance on alternative credit reinforces the idea that subprime borrowers actively seek ways to improve their creditworthiness, even if it means resorting to less-than-ideal options.

While alternate credit products provide immediate financial relief, they often carry high interest rates and fees that can strain subprime borrowers more. Subprime consumers are also more likely to be unemployed, have low incomes and are younger than other consumers. Combined with their low credit scores, these borrowers look high risk to lenders. These findings highlight the gaps in the traditional banking system, where many subprime consumers remain underserved.

Subprime borrowers use credit as a tool to improve their credit profile

Consumers with low credit scores see access to traditional credit products as an important financial milestone.

Despite the challenges and the utilization of alternative credit, subprime borrowers still aspire to access traditional credit products. Data shows that they 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. This highlights traditional credit’s perceived value and importance in achieving financial stability and upward mobility. In other words, consumers with lower credit scores are still interested in being in the credit market, and methods targeted at bringing them on, such as secured cards, will have a wide audience.

The desire for traditional credit extends beyond just credit cards, with subprime borrowers expressing greater interest in obtaining various types of loans, including personal loans, mortgages and auto loans. This suggests a broader aspiration to participate in the mainstream financial system and access its benefits, such as lower interest rates, rewards programs and the ability to finance larger purchases. Subprime consumers (18%) are also twice as likely as those with high credit scores (8.4%) to show interest in getting a debt consolidation loan, indicating that subprime consumers are also proactively seeking ways to better manage their existing debt.

These findings underscore the need for financial institutions to develop strategies for serving the subprime market responsibly. Products like secured credit cards, which require a security deposit, can provide a pathway for subprime borrowers to build credit while mitigating risk for lenders.

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Methodology

“Subprime Borrowers Flock to Alternative Options Due to High Credit Card Denial Rate,” is a PYMNTS Intelligence exclusive report. This edition examines subprime borrowers’ use of traditional and nontraditional credit products to improve their credit scores. It draws on insights from a survey of 2,330 U.S. consumers conducted from Jan. 14 to Jan. 23. Our sample was census-balanced to match the U.S. population, with 51% of respondents identifying as female. The average respondent’s age was 48, and 40% annually earn more than $100,000.