In 2016, an increasing percentage of consumers were turned down for credit cards, auto loans and mortgages. Economists believe the change from 8.3 percent declines one year ago to current levels of 9.9 percent is supply driven, resulting in a notable change in lending behaviors on the part of the nation’s financial institutions.
While people with all kinds of credit profiles were turned away, rejection rates were highest among subprime borrowers. Roughly 30 percent of borrowers with FICO scores below 680 were rejected for a loan, compared with 25.9 percent the previous year.
For community financial institutions (FIs), the opportunity to say ‘yes’ when other lending institutions are saying ‘no’ may be worth investigating. Indeed, evaluating opportunities to take managed risk is something that can be extended across departments and product lines.
For the first time since the Great Recession, riskier borrowers are gaining access to credit. As a result, the number of credit card accounts is rising. Ten million new consumers, 60 percent of whom were subprime borrowers, entered the credit card marketplace in the last year alone. Unlike prime borrowers, who are generally paying down debt, riskier consumers are increasing card balances to $5,063, on average, from $4,891 a year ago.
To ensure managed risk, savvy issuers targeting subprime borrowers are executing a series of smart strategies, such as limiting the initial credit line and offering secured products to help consumers ‘build’ good credit. These FIs then pro-actively manage their new accounts over time. When new cardholders demonstrate healthy financial behaviors, such as on-time payments, the credit union or community bank provides a customized path to “next step” credit products.
Subprime borrowers have long faced more expensive credit terms. The average annual rate for all borrowers is 18.2 percent, while those with credit scores below 630 are charged 22.2 percent on average. Subprime borrowers have a higher tendency to revolve balances, translating to increased revenue for card issuers. Interest payments all cardholders make (not just subprime borrowers) account for 80 percent of the total revenue card issuers receive from consumers.
In addition to subprime borrowers, two other groups are evolving as ideal audiences to consider in your 2017 card marketing campaigns: Millennials and Generation Xers. Between 2013 and 2014, nearly two million Millennials became credit union members and now account for 28 percent of credit union account holders. In the same period, 1.9 million Gen Xers made the move and comprise 26 percent of account holders.
Without question, subprime borrowers, Millennials and Gen Xers are becoming more appealing to FIs of all sizes. Consider how your credit union or community bank may present a better option as these segments expand their credit needs.