The Problem: Lack of Access to Affordable Credit

By Kristen Stringer

Vice President of Banking & Credit Services

Depending on your location, you cannot drive down a busy commercial street without passing one or more payday lenders or pawn shops. With 78% of American workers living paycheck to paycheck, there is no question why there is a market for so many of these high cost lenders. There is a common misconception that those living paycheck to paycheck are minimum wage or low income earners, but the fact is that over 33% of those making between $50,000-$100,000 and 25% of those making over $150,000 per year live paycheck to paycheck. Surprising?

Financial challenges affect everyone.  

With so many Americans struggling to get by, access to credit is a necessity rather than a luxury. When most people think of credit, they think of traditional products such as a mortgage loan, auto loan, or credit card. 26 million adult Americans don’t have access to credit because they lack credit reports or credit scores. What many may not realize is that according to the New York Federal Reserve, this figure more than doubles to 60 million Americans when you take past credit history into consideration. That’s 60 million Americans who are unable to qualify for any credit cards or other traditional loans. 67% of consumers applied for a credit card during the calendar year; one in three were denied credit or offered less than they requested.

Lack of access to credit, let alone affordable credit, is making it nearly impossible for individuals to handle their financial challenges.

But the challenges do not stop for those who do have access to some form of credit. According to a recent survey by WalletHub, 33% – more than 86 million Americans – fear they will max out their credit card with a purchase of more than $100. A WalletHub analyst concluded that these Americans are over-utilizing credit which they will not be able to pay off in a timely fashion, resulting in paying more interest and damaging their credit score in the long run. According to Experian, having credit card utilization above 30% will lower your credit score even if you are making on-time payments.  This results in a vicious cycle of debt as consumers are forced to utilize credit cards to make ends meet or handle financial emergencies. They hurt their credit score and rack up excess interest charges, making it difficult or more expensive for them to access credit in the future when they have a need.

As of February 2020, the average outstanding credit card debt for Americans was approximately $6,900 with the average interest rate on purchases (cash advance charges are much higher) of 16.61%. If a consumer made only the minimum payment each month, it would take 17 years to pay off the debt and cost over $7,200 in interest charges. That equates to a total repayment of over $13,000 to pay off the original $6,200 balance. Sounds unreasonably expensive, and it is.

Now let’s consider those consumers without access to traditional credit cards with the average interest rate of 16%. Higher-cost loans and credit cards are often the only option available to handle a financial emergency. The most common loans available to this populous are payday or title loans. These loans are easier to qualify for but carry much higher interest rates and fees, and the typical pay-back period is much shorter than traditional credit products. Rates and fees are determined by individual state regulations, and according to the Consumer Financial Protection Bureau (CFPB) a typical payday loan term is two weeks with a fee of $10-$30 per every $100 borrowed. The calculation on a loan with a fee of $15 per $100 results in an APR of over 400%. 

An APR of over 400% makes the average 16% APR seem very affordable, and at 16% the interest paid was higher than the debt ($7,200 interest charged on a $6,200 balance). Think about that.  

Roughly 12 million Americans have to resort to a payday lending service each year with the average income of the borrower being $30,000. 58% of those utilizing these high-cost lenders already have a difficult time paying for their basic necessities (like rent and utility bills). This leads to individuals being unable to pay back the payday loan in the initial 2-week time frame, and many states allow them to “rollover” the outstanding balance for a new fee and extend the repayment term. Like making only the minimum payment on a credit card, these “rollovers” result in even higher interest or fee charges, contributing to the dangerous cycle of debt. 75% of individuals who utilize payday loans take out 11 or more loans in a year, usually within two weeks of repaying a previous loan. The original $200 loan can quickly result in more than $1,000 paid back.

While these figures seem astonishing and you may wonder how this practice is still legal, the unfortunate truth is that for millions of Americans this is their only lifeline when a financial challenge arises. Your employees deserve a better option. They deserve financial solutions that help them improve their financial situation, not drive them further into the cycle of debt. They deserve educational resources and tools that helps them develop an appropriate plan to not only manage their current finances but set them up for future success. This is where FinFit can help. Our financial wellness program offers access to resources and budgeting tools, financial coaches, and credit and banking solutions through FDIC-regulated banks that is typically more affordable than high-cost credit providers.

We’d love to help your employees and your organization thrive.

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