Why Credit-Based Home Improvement Financing is the Best Choice

Have you ever wondered what makes up the 3-digit number that is your credit score? Your credit score is based on the information in your credit reports that helps lenders determine how likely you are to pay back their money. Lenders use credit scores to determine how much you can borrow, how many months you must repay, and how much they will charge you in the form of an interest rate. 

The five categories making up your credit score include payment history (35%), amounts owed (30%), length of credit history (15%), new credit you are applying for (10%), and credit mix (10%). Your lender can access your credit score when you apply for a loan, and if they use a credit-based pricing system, this can significantly impact what rate they offer you. Credit-based pricing provides a competitive rate based on an individual’s credit risk and caters uniquely to many different types of consumers with varying financial histories. In contrast to credit-based pricing, uniform pricing offers one single rate to all applicants, accounting for the blended credit risk of the entire population. There are many reasons why a lender may choose to provide credit-based pricing.   

Impact of Credit-Based Pricing on Homeowners with Strong Credit  

Within the home improvement loan world, homeowners can pay a rate based on their individual risk assessment with credit-based pricing. Those diligent in maintaining a strong credit score are essentially rewarded for this by the rate they receive, allowing them to pay lower interest over time. This eliminates a major disadvantage that those with strong credit unfortunately see with uniform pricing. With uniform-pricing, homeowners with stronger credit have to pay a higher interest rate than they would if their individual credit risk was being considered. A uniform rate forces those with stronger credit to subsidize the higher-risk applicants receiving a rate lower than what their credit reflects.

Impact of Credit-Based Pricing on Homeowners with Fair/Growing Credit  

On the other hand, those with fair or growing credit are less likely to be denied a loan because of the low credit tiers available with credit-based pricing. This allows people of many different financial situations and backgrounds to be accepted for a loan. According to a recent statistic from Business Insider, the average credit score in the US is a FICO® score of 714. This is just an average, meaning many Americans fall above and below this number. According to Experian, a consumer credit reporting company, 40% of consumers have FICO® scores lower than 700. Many unforeseeable factors can contribute to a consumer’s credit score, including the recession that came from the COVID-19 pandemic, resulting in many Americans losing their jobs and the closure of many businesses across the US. Credit-based pricing opens up the possibility for many more consumers to qualify for a loan. 

How Contractors Benefit from Offering Credit-Based Financing  

Credit-based pricing not only benefits the homeowner applying for the loan but aids the contractor in their sales process and contributes to their business growth. Contractors can reach a broader range of consumers who may not have qualified for a loan under uniform pricing. Another perk is that the contractor can promote a lower headline interest rate to the entire group; for example, “interest rates as low as 10%.” The ability to cater to each individual uniquely based on their credit history allows more applicants to be approved, and as we know, more closed deals come with more approvals. Offering a unique rate that is aligned with your customer can increase their overall satisfaction and retention of your business.  

The Federal Reserve has raised rates more in 2022 than in any single year since 1980, leading to higher borrowing costs that are expected to remain at or increase at the current level through 2023. The credit-based program allows the contractor to offer lower interest rates that many customers can benefit from. In contrast, customers with lesser credit profiles can still be offered very reasonable rates. Letting customers know that their credit risk will be assessed does not have to be daunting, as many financial lenders use a soft-pull credit bureau inquiry that will not hurt their credit score. The overall positive impact that the credit-based pricing program has on homeowners and contractors is substantial. If you are in the home improvement business and curious about how offering financing can change your business for the better, get in touch with us today: https://watercressgroup.com/become-a-partner/  

Fill out this form to hear back from a member of our team shortly or watch our video to learn more about the power of offering financing.  

Madison Schoppe – Marketing Coordinator