One way to do this is by providing multiple payment options that will work for each type of homeowner. Yet times are tough. For the average American, debt is piling up, and credit scores are dwindling as inflation rises. So HVAC contractors have to aim to service every one of their customers but choosing the right types of lenders and knowing more about what affects consumer credit scores.

Customer Service

During a breakout session at Service World Expo in Phoenix, Arizona, FTL Finance — a consumer financing company specializing in the residential, HVAC, and home improvement industries — shared research done during their consultative selling process, which is the approach their team takes to gain insights about a contractor before they talk to them. What they found is an overwhelming trend of contractors wanting to provide excellent customer service.

Since customer service is such an important part of the process, it has to be represented every step of the way.

“This is from the very first moment when a customer realizes they're going to need to call an HVAC contractor, all the way through to that sometimes painful moment when a customer realizes that this project is going to be a lot more expensive than they were anticipating,” Cooper said.

Paying the bill is already an uncomfortable and difficult part of the process, and with inflation, to Cooper seems to be only growing in its difficulty.

“One of the best improvements you can make is by offering multiple ways for customers to pay,” Cooper said. “But we want to take that a little bit further and offer financing that isn't going to deny a large portion of the customer base.”

Lender’s P.O.V.

Lenders are dealing with the same economic conditions as the rest of the world: rates are rising and inflation is up.

“And due to these economic conditions … 51% of banks are reporting tightening lending standards for commercial and industrial loans,” said Todd Grzybinski, president of FTL Finance. “This affects all businesses that are looking for equipment approval or upgrades or something to do with the building — you're going to have a hard time getting money.”

Across the board, banks are tightening up lending, which is also affecting the consumer side of things. According to the Federal Reserve as of July 2023, 25% of banks are tightening requirements for customer installment loans and credit cards.

“So I would not be surprised if most [HVAC contractors] … offering financing are experiencing more declines than they were a year ago,” Grzybinski said.

Grzybinski shared that today, 74% of Americans are stressed about their personal finances, 37% of them are very stressed, 57% are living paycheck to paycheck and thus required to work, and 55% of them cannot pay for a $1,000 emergency expense without a credit card or loan.

It’s only exacerbated now that student loan forgiveness has ended. Most likely, those Americans with student loans have continued to take on more and more debt while the loans were frozen.

In fact, it isn’t just those with student loans who have taken on more debt. Grzybinski said every credit score band, from second quarter of this year to second quarter of last year, has accumulated $100,000,000 more a month in debt.

“Since 2021: $200,000,000 more a month in monthly debt obligations,” Grzybinski said.

What Makes a Credit Score

According to Cooper and Grzybinski, credit scores are affected by payment history (35%), available credit (30%), length of credit history (15%), newness of credit (10%), and credit mix (10%).

Getting credit, utilizing credit, and repaying credit is all a part of payment history. When payment is missed, it can impact a credit score by as much as 100 points, Grzybinski said.

“When that happens, it's usually not an accident, because lenders are sending reminders all the time. … So when a consumer misses a payment, typically, something's happened.”

Having available credit, utilizing it, and paying it off is a good thing. Yet if someone starts to exceed their credit card limits by over 30%, the credit score could be impacted by 50 points.

If a credit card was opened and left open and unused over a long period of time and then closed, that impacts a credit score, too. That length of credit history is measured by how many times someone opens and closes a credit card, and can affect a score by as much as 20 points.

“Just leave [the credit card] open, don't close it,” Grzybinski said.

Every time someone applies for a credit account, their credit score is affected. New credit typically impacts a credit score by 10 points every single time a certain line of credit is applied for. According to Cooper, about 50% of Americans opened at least one credit card in 2020.

“If you have a Best Buy card or a Home Depot card … but if it's just one type of an account, and it's all a revolving account, it's going to impact your score by probably five to 10 points,” Grzybinski said.

Lenders

There are four different types of lenders: super-prime lenders, prime lenders, near-prime lenders, and subprime lenders. And every homeowner deserves to be offered multiple lenders based on where they stand from a credit standpoint.

“So just it's a really good business practice just to have multiple lenders that can feed in and take on all different types of credit,” Grzybinski said.

Super-prime lenders offer credit to consumers with scores of anything above 720, and prime lenders offer credit to consumers with credit scores 660-718.

“So because they have excellent credit, and very low risk, these consumers are usually going to be offered really low interest rates or promotional programs,” Cooper said.

Yet only about 53% of American homeowners have a prime credit score or higher. So about 50% of an HVAC contractor’s customers are going to need another option. By offering a prime lender, an HVAC contractor is creating an easy, enjoyable experience for about half of their customers. The other half are worried about how they’ll pay, or that they’ll be denied and told their credit score is too risky, and their options are limited.

“To me, that sounds like a poor customer experience, and we all know how that can affect the bottom line,” Cooper said.

Cooper also shared that 50% of customers switch to a competitor after just one bad experience, which is why it’s vital for HVAC contractors to offer lenders that go into different credit bands. This is where a near-prime lender, offering credit to consumers with credit scores of 620-659, which is about 22% of Americans, can come in handy.

“It’s just incredibly important to make sure that people aren't increasing credit balances … So having a prime lender will allow those customers to still be approved for financing so they won't have to dig further into that credit card debt pit, but they also won’t have to take on a really high interest rate or a lease-to-own option,” Cooper said.

Lastly, subprime lenders offer credit to those consumers below a 620. Outside of credit scores, subprime lenders do sometimes look at things like the time on job or residence, or consider a co-applicant. This portion of the market is both valuable and underserved. This year, there were 31% fewer subprime loan approved than last year.

The average credit score for millennials/first-time homebuyers is 687. Additionally, 43% of millennials have a credit score in the subprime, Grzybinski said. And with half of America in that near-prime or subprime category, for an HVAC contractor to not offer a lender that can help those types of homeowners is to lose a customer.

“Something I hear a lot of contractors say is they won’t deal with subprime, it's too risky, it's going to take too much time, but the truth is there really isn't a significant difference in the process from a prime lender to a subprime lender,” Cooper said. “There's no additional risk or burden.”

While the interest rates and monthly payments are going to be higher, having a subprime lender does solve the immediate problem of being able to provide heat in the winter or air conditioning in the summer for all customers.

“Don't make the decision for them by just not offering them credit; let them make the choice,” Grzybinski said. “The whole point is to make sure you're offering lenders that can go the whole band of credit.”