Written by: Adam West
Edited by: Lillian Guevara-Castro
For the past half decade, I’ve been picking the brains of hundreds of the brightest minds in financial services as the Managing Editor for BadCredit.org.
BadCredit.org’s expert writing team has been going deep and telling compelling longform stories based on the hundreds of interviews I’ve conducted with leaders from well-known banks, credit unions, lending institutions, fintech firms, credit reporting agencies, and other verticals within the subprime lending community.
Before shifting into digital journalism, I worked on the sports desk for a local newspaper for more than a decade. Print media was falling off a cliff so I took a leap and landed at a digital media startup where I received an opportunity to learn about financial services from the ground up by writing daily industry news features and eventually managing outreach and conducting interviews with the true experts in this space. The ones who live and breathe it.
This is where my subprime education really began.
Hundreds of conversations with subprime experts over the years have been the definition of learning on the job.
These conversations enabled me to understand something I think mainstream consumers don’t understand about subprime lending. It exists because it is important, and it’s priced accordingly.
Consumers find themselves in negative cashflow situations and in need of credit access for all sorts of reasons from job loss and divorce to socioeconomic conditions and crushing medical debt. And with inflation stubbornly above the Federal Reserve target of 2.0%, that has people turning to credit cards maybe more so today than ever before just to keep food on the table.
The Federal Reserve Bank of New York reported that Americans owe a record $1.17 trillion on their credit cards after the third quarter of 2024, and a recent PYMNTS Intelligence report found that more than half of consumers use credit products for groceries pointing to a population living paycheck to paycheck and often struggling in between.
Credit card chargeoffs and delinquencies reached a 13-year high this past December, and bankruptcy filings were up more than 16% in the 12-month period ending last September, leaving higher levels of debt going uncollected.
And to make matters worse for lenders, no one knows what’s on consumer BNPL balances.
Buy Now, Pay Later is an emerging category that’s either a credit product or a payment method depending on who you ask. But high balances in this category that don’t involve credit checks or reporting mean other lenders are often making bets with the cards stacked against them as consumers may be more overextended than they appear.
Credit access is ultimately more important than pricing in the subprime lending sector as lack of access leads to would-be borrowers with few options.
When a financial institution lends money to someone with a thin or sometimes scary credit profile, their underwriters are pricing it accordingly based on the data available to them through FICO reports, soft pulls or alternative data like checking account cashflow trends. This data is often incomplete at best, especially among underbanked consumers.
So all of this and many other factors get priced into the model, and interest rates end up much higher. Many other applicants are denied outright, leaving them with worse or no options.
All things considered, interest rates on subprime loans simply have to be priced higher because a lender who signs up someone with a low FICO score has significantly lower odds of getting paid back based on that consumer’s previous behavior.
I like to use the analogy that prime customers are like celebrities who are often comped on drinks and dinner, while subprime customers always pay full price. Prime customers are granted premium credit card rewards and perks that make everything in life a bit more affordable, while subprime consumers pay higher rates and additional fees.
Despite the higher borrowing costs, though, subprime consumers need credit access. You may question why someone with a 520 credit score signs up for a high-interest auto loan, but how else are they supposed to keep a job without reliable transportation?
When I first started managing industry content for this website, some of my coworkers jokingly used to refer to me as “the face of bad credit,” and there was a time when I might have cringed when they said it. But I now understand the importance of credit access to the people who rely on it, and I’ll happily wear the moniker and enjoy the privilege of sharing my subprime musings with you through this column.
