Financial Education Can Help Subprime Consumers Triple Borrowing Capacity

In a credit-based economy like the United States, credit scores have a big impact on consumers’ ability to access loans and afford everyday essentials.

But as noted in the report “The Credit Accessibility Series: The Credit Insecure Need More Education,” a PYMNTS and Sezzle collaboration, 27% of consumers have credit scores of 650 or less, which is a major hindrance to accessing affordable credit products. Additionally, 53% of these consumers are dissatisfied with their low credit status, and a staggering 80% experience financial hardship.

For consumers with deep subprime credit scores (scores of 579 or less), there is an opportunity to improve their credit scores to the near-prime range of 620 to 659. This improvement could have substantial benefits, allowing them to finance an additional $44,000 in purchases and reduce their interest rates by up to 24%, per our research.

In fact, by increasing their credit scores, these consumers would have more discretionary spending power and lower annual interest payments, providing them with greater financial flexibility.

However, there is a knowledge gap among these consumers, with only 17% using credit builder apps primarily for credit-building purposes. This suggests a lack of understanding of credit intricacies and the potential impact of these apps on their credit scores.

Moreover, consumers with low credit scores may not necessarily be inclined to use user-friendly options to improve their credit knowledge, as just 40% of consumers expressed an interest in those materials.

To remedy that, these individuals with low credit scores will need to end their reliance on costly credit products and instead embrace financial products which can be leveraged to improve their credit scores.

One of these products is buy now, pay later (BNPL) financing which only 23% of consumers with low credit scores reported using and a mere 18% used specifically to improve their credit scores, per the report. This highlights the need for better education and awareness among consumers with low credit scores about the potential benefits of using credit products to improve their credit status.

Additionally, FinTechs and financial product vendors will need to find ways to reach consumers with low credit scores and provide them with user-friendly materials and education on credit building.

Merchants and providers should also take pains to market BNPL as a way to finance a purchase without taking on too much debt, Sezzle CEO Charlie Youakim told PYMNTS CEO Karen Webster earlier this month.

He explained that with BNPL, customers are diverting a flow of funds away from high-cost financing products to a more low-cost financing product. “It’s a big win for consumers,” Youakim said.

Overall, financial education plays a crucial role in empowering subprime consumers to triple their borrowing capacity, boost their credit scores, and reduce interest payments.