Why Credit Card Companies Love the Subprime Market Right Now

CardRates.com Staff • July 1, 2015

According to new data released in Equifax’s National Consumer Credit Trends Report, new credit growth for bank and retail-issued cards is now strongest among subprime borrowers (those with credit scores of 660 and below).

As consumers are becoming less credit averse post-recession, lenders are freely supplying the increased demand. With the tighter standards of the post-2008 credit bust easing up, credit issued to subprime borrowers is reaching highs, rivaling prerecession numbers.

Through July of 2014, banks gave out credit cards to 9.8 million subprime borrowers, a six-year high and an increase of 43 percent from the same period last year. Additionally, retailers issued 7.8 million cards to the subprime market, an eight-year high, up 13 percent from 2013.

In conjunction with increased approval rates, borrowers also are seeing increased credit limits. Bank-issued credit card limits climbed to $12.7 billion, a six-year high, up 4 percent from last year, and retail card limits climbed 16 percent to an eight-year high of $6.8 billion.

Senior Vice President and Chief Economist at Equifax Amy Crews Cutts notes “as the economy improves, consumers appear to be ready to expand, or in some cases, rebuild their credit.”

But while the appetite for new credit may be increasing, balances have remained far more steady.

“Interestingly, balances for both subprime and prime have risen very little, suggesting that while consumers are positioning themselves for growth, they are also hesitant to take on new debt,” Cutts said.

Lenders, however, don’t seem quite so hesitant as they continue to hand out more accounts with higher limits to borrowers with lower credit scores. Credit card issuers are taking advantage of the steady supply of cheap money being lent out by The Federal Reserve, expanding their customer base and increasing their business.

But while business may be booming, lenders’ risk of not being repaid also is increasing. Many lenders are preparing for this contingency by setting aside more in reserve to cover the cost of charging off unpaid card balances.

Capital One Financial, for example, is boosting its loss provision by 17 percent, expanding its contingency cushion as it continues to expand its lending. Discover also boosted its provision for loan losses by 17 percent and American Express boosted its third-quarter loss reserves by 16 percent.

If lenders are counting on losses, then why are they continuing to hand out credit cards to subprime borrowers?

Brad Jones of Equifax said it’s partly due to the behavior shift among consumers.

“As consumers continue to become less credit averse, financial institutions are in a different position than in the past five to six years,” he said.

This claim may be supported by steady balances among both prime and subprime borrowers, as well as a marked drop in late payments on credit cards in recent years.

Most likely, though, the card companies are banking on the profits from issuing new credit cards bringing in more than enough capital to offset the higher loan losses.

Photo credit: grouponworks.com

Editorial Note: Opinions expressed here are the author's alone, not those of any bank, credit card issuer, airline or hotel chain, and have not been reviewed, approved or otherwise endorsed by any of these entities.

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CardRates.com Staff

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