People with low credit scores may get a bad reputation for being irresponsible with money, but there’s at least one way some are making practical choices this summer.
People who have credit scores lower than “prime” — those with scores below 700, according to the frequently-used Fair Isaac Corporation (FICO) scale — are 29% less likely to take vacations this summer than those with prime credit scores, according to a study Tuesday from Elevate ELVT, -1.91% which markets credit cards to people with non-prime scores.
Elevate’s Center for the New Middle Class, which researches consumers with little savings and non-prime credit scores, surveyed 1,000 consumers in June. Some 317 of them had non-prime scores and 609 had prime scores. For those with bad debts or little actual credit history, it can take years to improve a credit score.
“While [it is] disheartening that so many credit-constrained Americans are unable to enjoy summer vacations away from home, it is reassuring to see responsible spending habits in place,” said Jonathan Walker, the executive director of Elevate’s Center for the New Middle Class, in a statement.
Credit cards targeting consumers with poor credit histories may not be the answer either. Such cards typically have a higher risk for the company and, therefore, higher interest rates for the customer. That can hurt consumers if they don’t pay their bill in full each month. They may be better off building a credit history with a prepaid card.
Elevate, for instance, offers Today, a credit card with Mastercard MA, +0.84% Its annual percentage rate (APR) ranges from 29% to 34%, and the card costs an annual fee of $75 to $125, plus a late payment fee of $35. That’s significantly higher than the average credit card interest fee of about 17%. (The Today card also has an annual fee of $75 or $125.)
Earlier this year, personal-finance company NerdWallet analyzed 10 popular “subprime specialist issuer” cards (SSIs), which are marketed to people who have low credit scores and may have difficulty getting a regular credit card. On average, they cost consumers more than $150 a year in annual fees, application fees and maintenance fees.
Americans still take out loans to take vacations
Still, many people are willing to travel on credit. The non-prime consumers surveyed were 61% more likely to borrow money for the vacation when they do travel, Elevate found.But they’re not alone: Many travel companies have made it easier than ever to pay for vacations — even offering personal loans to do so.
That choice can be particularly expensive for consumers with low credit scores, who have fewer options for credit, and who are more likely to pay high interest rates on loans and credit cards. The latest survey released Tuesday found that those people with non-prime credit scores were also twice as likely to have turned down a vacation for financial reasons.
FICO scores are calculated based on the consumer’s payment history (which counts for 35% of the score), the total amount owed compared to the amount of credit available (30%), length of credit history (15%), the “mix” of the types of credit the person has (10%) and how recently the person has gotten a new source of credit (10%).
