Bad Credit? You Still May Be a Good Risk for Credit Card Companies

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The credit card companies are mailing out ten times as many offers to open new accounts as they did last year, and what the offers show is that many people with bad credit are considered good for business. Often on the mailing lists are “risky” consumers with bad credit—so long as they have the right kind of bad credit. Being a “strategic defaulter,” for instance, is good, whereas someone demonstrated to be an “abuser” or a “slopper payer” shouldn’t expect too many pre-approved credit card solicitations in the mail.

These categories, cooked up by consultants to classify different levels of risky consumers (pardon the alliteration overdose), are described by the NY Times:

One is “strategic defaulters,” whose credit scores were damaged because they walked away from a home when its value dropped below what was owed on the mortgage. These borrowers made a bad bet on real estate but may otherwise be prudent risks because they make a good living.

Another category considered a good risk is the first-time defaulter, who had a long run of paying off debts on time and in full before getting into trouble during the recession. Unlike first-time defaulters, there are other consumers less worthy of second chances, such as:

“sloppy payers,” who pay only some bills on time; “abusers,” who are defiant about paying; and “distressed borrowers,” who simply do not have the means to pay.

After a long period of adjusting who was considered credit worth and closing millions of credit card accounts, the card companies are now ramping up efforts to attract new customers. By the end of 2010, some 2.5 billion offers will have been mailed out this year. Unlike in the past, when everyone and his dog received a pre-approved card (quite literally, Google it), the offers are now sent out more selectively. Banks and card issuers are on a quest to find consumers who are just the right level of risk: With credit that’s bad enough to force them to accept high interest rates and annual fees, but without a long-established history of not paying bills.

These new categorizations demonstrate something that consumers have long griped about: A single credit score is too simple, and often an unfair means of judging an individual’s credit worthiness. When you look at the nitty-gritty, two people with the same credit scores may actually represent very different risks for lenders.

Of course, the fact that a bank deems you credit worthy and gives you a pre-approved account doesn’t mean it’s a good idea to actually open the account. The words “pre-approved” may seem flattering or even validating, especially if you’ve been off the card issuer mailing lists for some time. But a consumer must know himself, and understand the likelihood of digging himself into debt with a new credit card. A good risk for the bank might be a bad risk for the customer.

Also, when you look at the terms of some credit cards, it’s the card issuer, not the consumer, who deserves to be categorized as an abuser.

The Christmas Without Credit Cards