During and after the financial crisis, consumers had a hard time obtaining new credit cards or accounts. This trend appears to be reversing, but a closer look at who banks are lending to has some experts worried. The number of new credit cards issued by banks this year has increased 25 percent, according to new data from credit bureau Equifax, but the number issued to subprime borrowers jumped 58 percent.
The number of credit cards issued to borrowers with credit scores below 660 — what Equifax considers subprime — has grown by 6.5 million this year. On one hand, this is a relatively small number, dwarfed by the 29 million cards banks given out to subprime borrowers in 2007. But the 58 percent increase is a sharp reversal from recent norms. In both 2008 and 2009, the number of subprime cards issued dropped by 35 percent and 60 percent, respectively.
Last year, this began to reverse; the number of subprime cards issued grew by 8.5 million, an increase of 12 percent. We’re on pace to blow past that number in 2011 — a prospect that worries Melissa Jacoby, professor of law at University of North Carolina and a fellow at the Harvard Bankruptcy Data Project.
“Not all credit cards are created equal. The devil is in the details on what the terms are,” she says. Unlike people with high credit scores, who may be able to negotiate a better rate, higher limit or other perks from their credit card company, people with low credit have fewer options, and the issuing banks know that. Jacoby says these consumers might accept high APRs in a quest for financial security that can become their undoing if they end up relying on those cards for basic expenses.
“The question is then whether they’ll ever be able to repay that debt, and that depends less on the principal than on the interest,” Jacoby says. “That compounds, and can become literally unpayable.”
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That’s bad news for debtors, but it can also be bad news for lenders that engage in risky lending. A MarketWatch.com article says not all lenders are equal when it comes to courting these riskier borrowers, noting that “Citigroup Inc … accounted for 33% of offers sent to borrowers with FICO scores under 660 in the third quarter.” The Citi spokeswoman contacted for the article declined to say whether the bank is deliberately going after subprime borrowers.
UNC’s Jacoby says that while this kind of behavior certainly wasn’t the only cause of the financial crisis, it did weaken banks that were already coping with tanking real estate portfolios and a global recession. And she’s not sure they’ve learned their lesson: “One concern I have is because banks weren’t forced to internalize all the costs of their risky decision-making before, they will make some risky decisions chasing profits for their shareholders.”