New research from LexisNexis Risk Solutions is highlighting an interesting trend in US consumer credit. The firm’s most recent internal data shows an impressive return to pracademic borrowing levels – with sub-prime and near-prime borrowers leading the way.
“Credit Invisible” Borrowing On the Rise
“Credit invisible” consumers make up a much more significant proportion of new credit applications than previously thought. LexisNexis data shows a 45% increase in consumer credit borrowing in June 2021 versus the previous year. Credit borrowing (credit cards, store cards, personal loans, and other products) increased 28% from January 2021.
However, the most surprising nuance of the data was the rise in borrowing among the credit invisible. Credit invisible borrowing increased 20% from June to July 2020. That trend has continued, with approximately 25% of credit applications being for sub-prime products.
COVID Not the Culprit
The initial instinct of economists is to point to the coronavirus pandemic. COVID’s economic downturn had a significant impact on consumer finances lends credence to the possibility that credit invisible consumers are turning to credit cards to help make ends meet. This hypothesis struggles when compared to data, however.
As analysts from the Bank Administration Institute (BAI) note, credit invisible consumers “aren’t monolithic,” meaning they cannot be easily defined into simple boxes. “Comparing June 2020 to June 2021, we saw that unemployment was nearly halved while our data suggests that applications from credit invisible applications rose an additional 30% over June 2020,” the report states. “Our takeaway is that financial stress can’t be wholly responsible for the increase in demand from this consumer segment.”
Banks Offering More Exiting Products for Sub Prime Consumers
Instead, the rise of high-quality credit products for underbanked consumers appears to be the culprit. Banks and fintechs are creating engaging products designed to win the business of underbanked segments, including recent immigrants, those new to credit, teens, and more.
The Sable One Mastercard, for example, is a secured rewards credit card aimed at the immigrant market. Beyond the ability to establish credit, the Sable Card provides up to 2% cash back on purchases and is free from hidden fees, including no annual fee.
Other, more established names are also taking a new approach towards secured credit cards. The Surge Secured Mastercard, for instance, offers cash back rewards on purchases. Previously, few secured cards offered rewards, with Discover being the most prominent example.
As BAI notes, credit invisible and sub-prime borrowers make up a sizable proportion of the credit card market. Because of this, lenders are becoming more willing to roll out innovative new products to try and win their business in an increasingly competitive marketplace. These innovations include lower interest rates, rewards, and a better-defined route towards unsecured credit (with the Merrick Bank Double Your Line™ Secured Visa® being a prime example).
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