How high-credit-score borrowers differ from lower-score peers

While people across the credit scoring spectrum take out loans, how much they qualify for and their reasons for borrowing depend on where they sit on that continuum, a recent report from Lending Tree revealed. 

How High Credit Score Borrowers Use Personal Loans shows that those with higher credit scores borrow larger sums, use the money for different reasons, and are often more comfortable with debt, chief credit analyst Matt Schulz said.

The most common reasons to borrow

Borrowers with a minimum credit score of 720 see an average loan size of $18,443, which is a total of 122% larger than the $8,301 pocketed by those with sub-720 scores. The most popular reason  (39.7% of loans) is consolidating debt. That ask averages $19,991.

The biggest average total borrowed by high-score folks, at $21,510, is for home improvements. That reason was cited by 12.8% of borrowers. Less than half of that rate, 5.7%, was cited by folks with lower scores for home improvements. The average amount, $10,114, was also less than half.

chief credit analyst Matt Schulz
Chief credit analyst Matt Schulz.

Borrowers with lower scores are more likely to ask for money to address immediate needs. While only 3.6% of them borrow to pay medical expenses, that is nearly double the 1.9% rate of their higher-score peers. The lower-score group is more likely to ask for moving expenses, business expenses, vacations, and weddings.

Higher-score folks seldom borrow for many reasons, but when they do, they go big, Schulz said. Their biggest loan amount, an average of $22,778, was for business reasons.

Lower credit scores = fewer options

Plenty is going on behind the numbers, Schulz cautioned. People with lower credit scores receive fewer options. That means lower sums offered at much higher APRs.

People with higher credit scores are more likely to have grown up in an environment where they learned how to use credit to their advantage. Home renovations are expensive, but they are usually a sound investment. Borrow some to make more down the road.

“Having a greater financial margin for error allows high-score, high-income individuals to use debt as an investment,” Schulz said. “So they can take on debt to improve their home and increase its value or to start a small business that can help generate more income for the family.”

Schulz stressed that Americans with higher credit scores and incomes are also in debt. They borrow more because they can. With their higher incomes, they can get their debt under control.

“In some ways, it’s emblematic of what happens in America,” he observed. “You have people doing great and take on debt because they can and aren’t worried about interest. Then you have folks who take on debt because they don’t have any choice. They need to make ends meet.”

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Simple steps all borrowers can take

Schulz conceded that when people accumulate large debts, they may lose hope and get overwhelmed. Whatever their credit score is, there are some steps they can take to get it under control.

Consider a personal loan to consolidate debt. It usually comes at a lower rate than people pay on credit cards. The act of reducing the number of payments to one reduces stress.

Search for 0% balance transfers to new institutions. Simply enough, call your issuer and ask for a lower rate. Schulz said that 70% who ask see some reduction, a trend that has lasted for many years. The average is 7% (from 24% to 17%).

“Especially if you can’t quite qualify for the 0% balance transfer that can get you down to zero, making that call is a good idea,” Schulz said.

Schulz said there was a spike in home improvement loans during the pandemic, and he expects interest in that sector to remain high. Vacation and wedding loans have also rebounded. 

Americans are spending again. Rates are rising. The effects, unsurprisingly, are beginning to show.

“We’ve already seen credit card balances start to rise pretty significantly,” Schulz said. “With higher interest rates, higher balances going on credit cards will only continue. That means more demand you’re likely to have for personal loans.”

How alternative data can revolutionize credit scoring

The use of alternative data has become prevalent over the past five years, and the positive effects have only started, Schulz said. Alternative data can revitalize scoring systems and provide new ways to identify safer bets.

  • Reporting successful rent payments to credit bureaus.
  • Regular cell phone payments made by undocumented people.
  • Better monitoring of BNPL transactions with standardized disclosure akin to credit card statements.

“They’ve consistently made all sorts of different things that just aren’t tracked by the bureaus,” Schulz said of those not usually tracked by bureaus. “Especially when you’re talking about buy now, pay later loans. 

“You could have somebody who’s taken out 25 Is these loans in the past year, never missed a payment, and they’re getting zero credit for it on their reports. (Yet) lenders will report you if you make a mistake, but they don’t report you if you handle your business properly.”

Schulz said that the looming expiration of the student loan moratorium is an X factor. Delinquencies have been low for many years, but they could soon rise in the current environment.

“There’s only so long you can raise interest rates (with balances increasing on the loans) and then drop something like adding student loan payments back into the mix before things take a turn,” Schulz said. “This is a little bit of a return to normal after having low rates and delinquencies for so long.”

  • Tony Zerucha is a long-time contributor in the fintech and alt-fi spaces. A two-time LendIt Journalist of the Year nominee and winner in 2018, Tony has written more than 2,000 original articles on the blockchain, peer-to-peer lending, crowdfunding, and emerging technologies over the past seven years. He has hosted panels at LendIt, the CfPA Summit, and DECENT’s Unchained, a blockchain exposition in Hong Kong.