Why banks pull back from lower-credit borrowers
Why banks pull back from lower-credit borrowers
Many households don’t think twice about their monthly subscription costs. Streaming services alone can total more than $100, but that doesn’t surprise anyone. Ask the same household to pay an annual credit card fee, and the reaction flips, even though it could be less than their subscriptions combined.
A new study from the Digital Banking Report, sponsored by Credit One Bank and authored by industry strategist Jim Marous, found this very contradiction at the heart of consumers’ conundrum. If they’re willing to pay recurring fees for convenience, why does the same logic break down when the fee buys them access to a financial system?
The data points to an unassuming answer. The pullback from lower-score borrowers isn’t about regulation, and it isn’t about profitability. It comes down to choice.
The Bank Retreat Is Real
Lenders are walking away from a large slice of the population. A little over half (56%) of institutions reported a decrease in their willingness to lend to borrowers with credit scores below 670 over the last three years. Only 11% of banks increased lending. Specifically, 48% moderately decreased their willingness to lend, and another 8% cut it sharply.
The Consumer Financial Protection Bureau’s 2025 Consumer Credit Card Market Report also shows this downward trend: The share of large-bank organizations lending to lower-score borrowers fell from almost a quarter (23.3%) in early 2022 to 16.4% in early 2025.
On the other hand, the Financial Health Network’s Pulse 2025 research found that only 3 in 10 (31%) of households qualify as financially healthy. That means that more than two-thirds of the population sit in a vulnerable financial state.
Supply is contracting at a time when more people need the product.
‘We Can't’ Turns Out To Mean ‘We Choose Not To’
The financial industry cites regulation as the reason for its retreat, yet the survey doesn’t support that explanation.
When asked which factors held them back from lending to borrowers with lower scores, nearly 9 in 10 (87%) said expected credit losses. The second biggest reason was costs related to acquiring and servicing accounts, coming in at a little over half (57%). Regulation constraints were only mentioned by a third of institutions (32%).
Additionally, nearly half of respondents see borrowers with credit scores below 670 as moderately higher risk; that perception increases steeply when scores fall below 600. Only about 1 in 5 (18%) institutions said they see borrowers with 670 credit scores as comparable to prime consumers.
That changes the debate. The barrier is a decision the lender makes about how much risk it wants to pursue, not regulations.
The Fee That Nobody Explains
Over two-thirds (69%) of institutions said fees are essential or very important for sustainably serving higher-risk consumers. So fees are seen as the mechanism that makes lending to this group work. The problem, however, is that the industry has never bothered to explain why.
The report states that the industry failed to clearly explain and promote why these tools exist. The annual fee, in particular, it states, carries a stigma that does not match how consumers spend their money elsewhere. Many don’t realize that an annual fee actually costs less per month, because it’s rarely ever framed that way.
The report states that in a responsible approach, the institution should offer tools to support the consumer’s progress, with the product’s cost decreasing as the consumer’s profile improves.
The Piece That's Still Missing
The data closes on a gap. When asked which strategies they actively use to improve outcomes for nonprime consumers, 8 in 10 (82%) institutions cited transparent pricing and disclosures, and nearly two-thirds (65%) cited credit education or financial literacy tools. Those are the easy, low-cost moves.
The harder, more structural tools lag badly. Only a third (32%) use alternative underwriting data, another third (32%) use digital tools to encourage responsible usage, and just 1 in 5 (22%) offer gradual credit line increases tied to performance. Education and disclosure are foundations, but the survey suggests the industry has largely stopped there rather than building products that actively help people climb.
The tools to close the gap exist, but mostly sit unused. Whether modest fees are the gateway the report calls them or a gateway that conveniently happens to be the sponsor's product, the report's sharpest point is the simplest one: nobody has bothered to explain what the fee actually buys.
Methodology
The central findings come from a survey the Digital Banking Report fielded in April 2026. Respondents spanned global, regional, and community banks, plus credit unions and fintech firms, sorted by asset size and portfolio size. The breakdown: 31% credit unions, 30% community banks, 18% global banks, 14% regional banks, and 7% fintech firms. Half reported assets between $1 billion and $10 billion.
The report pairs that survey with outside data. CFPB figures on card originations, Federal Reserve household numbers, the Financial Health Network's Pulse research, and EverFi's work on financial confidence all show up as corroboration. One thing to keep in mind while reading the percentages: several questions let respondents pick up to three answers, so those totals run past 100%.
This story was produced by Credit One Bank and reviewed and distributed by Stacker.
