February 2, 2023
4 min read
As a point-of-sale financing company that provides payment plans for people establishing or building their credit, retailers often tell us that their customer base is not non-prime or credit invisible. But from our experience working with 15,000+ retailers and their customers, we’ve learned that there are many common misconceptions about where consumers may be on the credit spectrum.
So who are non-prime and no-credit consumers, and why are they such an important segment for retailers?
Consumers that have credit scores below 660, unscorable credit, or no credit score at all represent 47% of the American population.
Divorce complications, medical bills, and student loans can impact credit scores in the blink of an eye.
Those new to credit, like recent college grads, new members of the workforce, and immigrants may be considered “credit invisible”, or have too thin of a credit file to be scored by the 3 major credit bureaus (TransUnion, Equifax, or Experian).
As more consumers turn to point-of-sale financing for larger purchases, it’s important for retailers to have payment options for those establishing or building credit.
That’s just above the U.S. median of $70,784, according to data from Experian.
It’s a popular misconception that non-prime consumers have lower income levels and won’t shop at stores that sell higher-end products. Someone making over $100,000 per year could have a lower credit score than someone making $25,000 per year.
Credit scores are complex calculations based on a variety of factors that have nothing to do with income, including:
Length of credit history
Amount of debt used
Amount of debt available
Number of credit inquiries made
Customers building (or re-building) their credit need alternative payment options. Here’s what a customer who financed a 3-piece sectional and stools told us:
My credit is kinda crappy (poor choices when younger) and I'm still rebuilding my credit. Because of Koalafi, I was able to purchase a big couch for my living room and buy dining room chairs for my kids.
- Stephanie H
Gen Zers and Millennials are still building credit while establishing their careers and paying off student loans and mortgage debt.
Although Gen Z and Millenials are viewed as the “next generation” of shoppers, they already account for nearly 60% of all point-of-sale financing applications.
This is a generation of omnichannel shoppers. They expect a frictionless checkout experience, in-store and online. Their path to financing a purchase should be easy and transparent, just like this:
Imagine 100 people apply for financing from a primary lender, and 47 are declined because their credit is too low.
Twenty-eight (60%) of those declined will not go on to make a purchase, according to a customer survey we ran in November 2022.
At a $1,000 average ticket, that’s $28,000 in missed revenue by not having an alternate financing option for non-prime customers.
It’s not just revenue that’s impacted here. Customer experience and brand equity is at risk: 22% of consumers who get declined for financing leave with a more negative perception of that retailer.
Luckily, there are ways for retailers to capture as much of this market as possible.
Retailers can provide alternative financing options like “second-look” loans and leases to service non-prime and no-credit consumers.
Near-prime consumers with credit scores from 659 down to 600 (and sometimes lower) typically qualify for a second-look loan. This represents over 9% of US consumers.
Consumers with credit scores below 600 or customers with no credit at all are typically a good fit for lease-to-own financing. This group represents 38% of US consumers: 15% with a sub-600 credit score and 23% who are “credit invisible” or have unscorable credit.
People who are establishing or building credit should be taken seriously by retailers who offer merchandise at all price points. Non-prime and no-credit represent nearly half of all American consumers, have similar household incomes as the U.S. median, are primarily Gen-Z or Millennials, and are quite receptive to alternative finance options, like second-look loans and leases.
Are you giving every customer the path to make payments over time?
Nearly half of U.S. consumers aren't eligible for traditional financing options, like store credit cards or BNPLs. Learn the best alternative financing options to offer them and how to implement them in-store and online.
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Koalafi offers Lease-To-Own and Lending solutions. Loans issued by The Bank of Missouri, serviced by Koalafi