Rewriting the Rules of Subprime Credit With Paycheck-Linked Payments
For the 98 million Americans with non-prime credit scores, access to affordable credit remains one of the toughest financial hurdles. According to the CFPB, only 7% of these consumers are approved for a credit card each year. Traditional approaches to managing default risk like charging high fees, requiring security deposits, or severely limiting approvals, may protect lenders, but they do little to help consumers break the cycle of debt.
The result is a persistent credit access gap. Many financially capable individuals are left with few options, causing them to turn to costly alternatives that can damage long-term financial health.
A New Approach: Paycheck-Linked Payments
Paycheck-linked payments are shifting this paradigm. This payment mechanism allows consumers to split their payroll direct deposit so that a portion of their paycheck automatically pays down their balance each payday. It aligns repayment with the customer’s cash flow, creating healthy, sustainable financial habits.
For lenders, the results are compelling. Tying payments directly to income can reduce losses by as much as 250% compared to industry averages, transforming risk profiles and making higher approval rates possible. For consumers, the benefits are even more significant. It provides them with access to affordable spending power and fosters healthy payment habits that can build credit over time.
How It Builds Credit Scores
A credit score is built on several key factors, and paycheck-linked payments strengthen each one:
● Payment History: Automated payments from a paycheck mean on-time payments, every time. This prevents consumers from missing a payment and builds positive payments history.
● Credit Utilization: Frequent paydown with every paycheck keeps balances lower, improving utilization rates.
● Credit History & Mix: For many, this may be the first opportunity they are given to establish credit history, or to diversify their credit mix with new products.
This payment mechanism has proven to have a material impact on credit scores. Perpay members for example see a 32 point increase on average in the first 3 months, with 45% graduating to a higher credit band (i.e. subprime to near prime).
Looking Ahead
Paycheck-linked payments are proving to be a scalable, sustainable tool for improving financial health in the subprime segment. With over 60 million subprime consumers receiving a regular paycheck, the opportunity for impact is enormous.
Author Bio: Chris DiMarco is the Founder and CEO of Perpay. To learn more about how consumers are building credit with paycheck-linked payments, visit perpay.com