Rising Card Delinquencies May Push Subprime Consumers to BNPL and Debit Installment Plans

Last December, PYMNTS Intelligence detailed in its “Credit Card Use Deep Dive” report that about 14% of the more than 3,500 consumers surveyed had subprime credit scores.

Those consumers tend to be tied to a FICO score below 670, as defined by the major credit reporting bureaus. Generally speaking, the lower the FICO score, the harder it is to get new credit, or have credit lines increased; interest rates charged on various types of debt tend to be higher than would be charged for higher-scoring consumers. In recent months, other PYMNTS reports have found that about 20% of cardholders were hitting their credit card spending limits.

Delinquency Rates Move Higher

In a Friday (Dec. 6) posting from the Kansas City Fed, there’s a bifurcation that is seemingly taking shape. Research from the “economic bulletin” noted that even against the backdrop where the central bank had increased its Fed Funds rate dating back to 2022 — and where interest rates moved higher in response — as of September, “credit card delinquency rates have not risen for prime borrowers since policy tightening began.”

The same cannot be said for subprime borrowers, as delinquency rates surged by 5.6 percentage points over the same period, to about 22%. The data from the Fed also indicated, per the report, that subprime delinquency rates may stabilize.

We note that delinquency rates do not mean that borrowers are necessarily headed into default — rather, they may be a sign that individuals and households will make, and are making, moves to address those delinquencies. PYMNTS Intelligence research has shown that there’s been a shift underway toward using different payment options — without taking on more interest-bearing debt, while stretching out cash flow — to manage the challenges of already extant financial pressures.

In a report released Wednesday (Dec. 11), PYMNTS Intelligence noted 8.9% of respondents who frequently encountered cash flow shortages used buy now, pay later (BNPL) in the past 30 days. That’s above the 2.5% of financially stable consumers reported using BNPL during the same period. Given the fact that 22% of consumers say they sometimes experience cash flow shortages and 13% report they experience cash flow shortages frequently, there’s a significant installed base that may consider using BNPL in the months ahead.

Inflation Ticks Higher

Inflation, as the Bureau of Labor Statistics announced announced Wednesday, ticked higher in November to an annualized pace of 2.7%, up from previous readings as prices for food and shelter climbed.

Elsewhere, in “Navigating New Norms: The Use of Card-Linked Installment Plans in Online and In-Store Sales,” PYMNTS research found that only 6% of acquirers, enabling both debit and credit options, offer installment options. Consumers are familiar with installment payments, representing an opportunity for banks willing to move more firmly into pay-over-time options. That included debit options, where debit is used as a budgeting tool to spend the cash that is on hand.

Consumers paying with digital wallets used stored debit cards in 55% of grocery transactions, as well as 52% of retail transactions, 62% of restaurant transactions and 46% of travel transactions.