The financial crisis of 2008 gave birth to a new economic class: Working-yet-productive cash-crunched Americans with sub-prime and non-prime credit scores. These Americans have a credit score of less than 700 and virtually non-existent savings. Their numbers are growing fast. Right now, the category stands at 160 million in the U.S. alone. And because of their low credit scores, these productive Americans only have access to expensive credit options or no credit options at all leaving them with limited recourse to tackle their financial needs. All it takes is one small emergency to push a potential borrower from prime to non-prime.
At what level does a bill become a crisis?
A small incident like a broken arm, car repair or interstate move can tip the borrower into a crisis mode.
Mean Number of months respondents can go on after a drop in income:
This shows that the trigger for default is usually an unexpected emergency. It is very important for lenders to model these emergencies and incorporate them into their credit decision models. Understanding the growing frustrations of this “new class” of people, Elevate specializes in online lending to non-prime borrowers an has originated more than $3 billion in credit. They studied their clients’ data to understand the needs and desires before launching the Center for the New Middle Class.
Why is There a Need for the Center for the New Middle Class?
Under the stewardship of Executive Director Jonathan Walker, Center for the New Middle Class opened in late 2016. Most companies fail to understand the behavior or challenges of these non-prime Americans, he said. The center is a research-focused body developed to engage and educate the industry and the public about the growing needs of individuals who do not have access to traditional credit options. The Center recently released its first report on the effects of the credit challenges of Americans. Rave reviews about its first report have helped bolster the center’s confidence, and now it plans to publish at least 4-5 major studies per year.
The Center is also tackling the misconception that people who are sub-prime don’t understand financial wellness, which is not true. The report tries to help understand that these workers are not in their financial situation due to ignorance or sloppiness. The report finds that it is a culmination of various factors such as medical bills, car repairs, or other emergencies that push consumers into the non-prime category. Knowing how vicious the bad credit circle is, it is almost impossible for consumers to get out of it. Stats say 37% of non-prime Americans can’t progress because they don’t have a credit score, which brings home the point that it is difficult for non-prime customers to get by.
Bad credit is not the sole reason for a poor credit score. Lack of credit and an opportunity to demonstrate creditworthiness is a much bigger obstacle for this new middle class. For instance, in last 12 months, 6% of non-prime Americans were denied a job, 12% of the Americans were denied an apartment, and 45% of non-prime customers were denied credit due to poor credit. Seventy percent of non-prime consumers feel they need a loan to build credit. This is one complicated cause and effect conundum.
The Effect of the New Middle Class
The idea behind using “Elevate” in the center’s name was to give it more credibility as Elevate is a well-known company in the space. To ensure an honest conversation across the lending industry, Elevate uses its own company data to execute the research ensuring reliability and consistency. Reports are stacked with stats so readers can understand the problem granularly.
The idea behind a “new middle class” was to make people understand how evolved the term “middle class” has become. In past decades, “middle class” referred to people who worked in factories and held blue collar or labor jobs, but today there has been a major swing in the workforce. Nurses, health care providers, government employees, and other white-collar workers make up the new middle class. A staggering 45% of this American population is non-prime. Non-prime has been historically considered below FICO 700. That puts the borrower at the mercy of a lender’s expanding its balance sheet.
Chances of conflicting data between the Elevate customer base versus the Center’s target population are extremely slim as the Center targets a much larger and wider population than the present Elevate client base. In the long term, there will be instances where the Center will record data that will not apply to Elevate’s clients. In coming years, this new middle class will grow into a full-blown segment, and that’s why the Center the New Middle Class has invested a lot of time and resources in trying to understand the needs and issues of this new class of Americans.
Why Online Lenders Need Elevate’s Data
Two of the biggest issues that exist in the sub-prime segment are price and quality. People who borrow at the highest rates are the most prone to default. Being able to differentiate between constituents is essential. Companies need to understand how to price products that are ideal for these clients. Only then will they be able to cater to the vast majority of the new middle class.
Data analytics is essential for taking advantage of the new information companies possess about borrowers and their behavior. Even more important is to create a clear road map for helping good borrowers to migrate to a prime score. Unlike payday lenders, Elevate reports the borrowers’ loan performance to major credit bureaus. This has helped more than 2,500 of its customers improve credit scores to the point they are now considered prime. This is a win-win for borrowers and the company.
Written by Heena Dhir.