You may have noticed a recent increase in credit card offers coming through your inbox and mailbox. This is due to an increase in lenders willingness to take on risky borrowers. Although the credit card crisis was a result of unpaid mounds of debt, credit cards have seen the recent decrease in delinquency as a fresh opportunity
As of now, news of subprime lending increases is limited to credit cards. Although banks are upping the anti when it comes to lending to subprime borrowers, they are still only targeting the best of subprime borrowers — those with FICO stores that fall between 620 and 660 — according to The Wall Street Journal.
Credit Card Solicitations Sky Rocket
The reason the subprime market is so appealing is because these individuals generate a lot of revenue for banks. The amount they pay in late fees and annual fees surpasses that of credit-worthy borrowers. Banks are also able to charge these individuals a higher interest rate — another reason for their increased value.
Basically, Banks are capitalizing off of individuals financial struggles to a point where they are even enabling these consumers to make bad money decisions. R.K. Hammer Investment Bankers, a credit card issuer advisor, found that on average lenders make 70% of their revenue off of fees owed by subprime borrowers. This is a 22% increase from the amount made off of prime borrowers.
CARD Act to Blame?
The Credit Card Accountability Responsibility and Disclosure Act was created to provide the ultimate consumer protection against credit card companies fees, interest rates and so on, but recent efforts by lenders to retain revenue may be proof that the act is more harmful than beneficial. Banks like Citi, for example, are upping their offers to make them more appealing to borrowers, yet finding loopholes in the act to charge higher interest rates. The Citi Platinum Select MasterCard® is now extended to an 18 month introductory period for balance transfers, but this extension comes at a cost: the third APR tier is now raised to 20.99%—an unattractively high APR.
Top Subprime Borrowers Less of a Risk
As credit delinquencies and write-offs decrease credit card issuers do not have to worry as much about losing money from borrowers that simply cannot pay. The reasoning for targeting the best of the subprime borrowers is more calculated than just getting bigger returns off of their payments. The strategy? This target market is not as risky as their name may suggest. Some experts believe that subprime borrowers that fall between the 620 and 660 range are their due to circumstance, such as temporary job loss or just simply falling behind on bill payments — not necessarily due to poor financial management ingrained in their habits.
Subprime credit card lending may be on the rise, but so is the average interest rate. The Wall Street Journal did point out that the current rate is at an average of 20%, a 2.4% increase from the previous year. Subprime borrowers eligible for a credit card should evaluate their reasoning for getting the card. Is it to spend more money that you do not have? Or is it to get your credit back on track? Any individual applying for a credit card should do so with caution and understand that if the card is not used properly, it can spiral into mounds of debt, and poor credit.