How many consumers have bad credit?
A 2019 Experian Consumer Credit Review found that 16% of consumers have a “very poor” credit score, and 18% have a “fair” credit score. In many cases, lower credit scores reduce the likelihood for prime interest rates. A Federal Reserve report found that 39% of Americans don’t have enough money on hand to cover a $400 emergency expense.
Odds are, you have customers shopping in your store that have similar credit challenges. Understanding what they’re up against gives insight and helps you offer financing options that make it possible for them to get what they need.
Bad credit affects many Americans
The reality of the current economic situation is that many Americans are one hiccup away from financial stress. This means that many of your customers are living paycheck to paycheck and have little to no money saved for a rainy day or even a minor emergency. As a retailer, it’s important to offer financing options that benefit people trying to build or improve their credit, while still allowing them the chance to get what they need.
What is a bad credit score?
If a customer has a FICO score between 300 and 579, they are considered to have “poor credit.” A score of 669 or below would be defined as “fair credit,” according to Bankrate. Finance companies commonly use consumer credit scores to determine loan eligibility, loan amount, and interest rate. With bad or poor credit, consumers may be denied loans or offered higher-than-average interest rates.
Consequences of Bad Credit
Bad credit scores generally mean that consumers will pay higher interest rates when they borrow money or apply for a credit card. Consumers with bad credit are usually motivated by merchants that want to help them in some way. Offering your customers financing alternatives for something they need and helping them get back on their feet financially is a win-win for both parties.
Financing options for customers with bad credit
People with bad credit often feel hopeless. Many have been denied by their bank or credit union and can’t get a credit card. Payday loans and other alternatives start to look more attractive and seem like the only solution. But there are other options open to people with bankruptcy, bad credit, or no credit history.
Secured Credit Cards
Secured credit cards are an option for consumers that have money to put down as a deposit. These credit cards work like a regular credit card but require a deposit to borrow against. If they make their payments on time, this is a good way to build their credit. Most secured cards report to the credit bureaus like a regular card and will show a positive payment history. Once a cardholder has established a positive credit history, card companies will often upgrade them to a standard, non-secured card.
Peer-to-peer lending is a personal loan between peers. There are companies that facilitate those transactions between parties while helping to assess the risk of borrowers. People with bad credit can use this as an option, but like traditional financing, the tradeoff is higher interest rates.
Lease-to-own companies help retailers offer financing for home appliances, furniture, electronics, or other large items and approve a wide range of credit scores. Some financing companies have an online option to give your customers an approval answer while in your store or online.
What about consumers with no credit history?
Another group of Americans who fall in the bad credit range are those who don’t have a credit history at all. According to the Consumer Financial Protection Bureau, 26 million U.S. adults are considered “credit invisible” due to lack of credit history. If your customers fall into this group, possible options are loans designed to build credit from:
- Credit Unions
- Lease-to-Own Companies
How can consumers improve their credit score?
First, they can be proactive. Knowing their credit score helps people know what to expect from lenders. Getting a copy of their credit report allows consumers to take care of the negative items and improve their credit score.
Second, paying bills on time every month and resolving items in collections go a long way in repairing credit. Bankruptcy and garnishments stay on the consumer’s credit report for several years. So, establishing a positive credit history following any negative activity proves that consumers are improving their behavior and learning from the past.
A large portion of your potential customers are one unexpected expense away from financial strain. Many are living paycheck to paycheck and have very little saved for emergencies. As a merchant, it’s important to understand the needs and financial situation of your customers. And one way to help them is by giving them options. Offering financing alternatives gives your customers another reason to choose you when looking for what they need when they need it most.