March is Credit Education Month, and if you look at the data available on the state of consumer credit, it’s needed. According to the Corporation for Economic Development (CFED), nearly 56% of consumers have subprime credit scores. Despite the economic recovery, the subprime credit industry is booming. Twelve million Americans take out payday loans each year, with the fees adding up to more than $7 billion. On average, borrowers are spending $520 in fees for a $375 loan.1
Something needs to change. For starters, consumers are turning to credit because they have a lack of cash on hand. Last year, we surveyed American workers and we found that many are living paycheck to paycheck. Forty percent said they don’t have $2,000 in emergency savings for unexpected expenses.2
The current scoring model leaves many employees behind
For many employees, paying cash simply isn’t an option. Because of the score-based model that is commonly used to determine credit-worthiness, nearly 56% of consumers are limited to subprime credit cards, rent-to-own, or payday, pawn and title loans.
The problem with those options is that for every dollar employees try to finance to make purchases, they are charged high interest and financing charges, and risk incurring late fees and other penalty fees.
Here’s a snapshot of the options and implications:
- Subprime/in-store credit card – high interest rate; potential late fees and ballooning interest; open-ended payment terms can cause price to spiral.
- Payday loan – finance charges on a typical payday loan equate to 400% APR.3
- Rent-to-own – annual interest rates equate to 100%.
Consequently, they simply do not have affordable financing options. And the stress that comes from those financial options is affecting their work performance.
The world of credit is changing
That’s why Purchasing Power was created – to fill the gap for employees who need an alternative. We also recognize that there is a need for education to help employees prepare for financial emergencies and make wise financial decisions. To that end, we also offer access to Quizzle, which offers free credit reports and education, as well as LifeCents, which offers financial assessments and education tools.
For our customers who need an alternative credit report, we offer eCredable, who builds a credit report based on verified on-time bill payments. However, we’re not alone in trying to change the world of credit. All of the major credit bureaus are looking at alternative scoring methods or providing educational tools for their customers. They’re also adjusting their scoring models. Last year, Experian, Equifax and TransUnion announced that they’re making it easier to dispute errors on credit reports and delaying reporting unpaid medical bills for six months.
Ultimately, the goal is to give consumers greater financial flexibility by shaking up the traditional model. When consumers are no longer reduced to a score – which is calculated in a way that many don’t understand – they can access a wider array of financing options. And that results in great financial well-being.
1 The Pew Charitable Trusts, “Payday Loan Facts and the CFPB’s Impact”
2 Harris Poll on behalf of Purchasing Power, Nov. 19-23, 2015, among 741 U.S. adults working full-time.
3 The Pew Charitable Trusts, “Payday Loan Facts and the CFPB’s Impact”