For the last two years , its been nearly impossible for subprime borrowers to qualify for a loan of almost any kind. But that's beginning to change as banks slowly return to lending. First up: credit cards.
Consumers with less-than-perfect credit scores are once again targets for card issuers. A growing number of banks have picked up the pace of card offers to the best of of subprime borrowers—typically those with FICO credit scores between 620 and 660. According to credit-card comparison site, CardHub.com, the number of solicitations for cards sent to that group has risen up to 300% since June. Among the most prevalent senders are large lenders like Capital One and HSBC, who say the campaign is part of a bigger effort to provide access to credit to more borrowers.
For subprime borrowers, this is just the beginning. "We'll see more of these offers this year to the cream of the subprime," says John Ulzheimer, president of consumer education for SmartCredit.com, a credit-monitoring web site.
Before the credit crisis, subprime was an important market segment for banks. They generate more revenue from fees – including late fees and annual fees -- from subprime customers than from more credit-worthy borrowers. And banks charge them higher interest rates, too. Crisis or not, lenders receive, on average, 70% of their revenue from subprime borrowers in fees; prime borrower fee-related revenue stands at 48%, according to R.K. Hammer Investment Bankers, which advises credit card issuers on their cards.
Now, as charge-off rates—money owed that lenders have written off as a loss--and delinquency rates decline (they were at 8.49% and 4.59% respectively, according to third quarter Federal Reserve data, down from highs of 10.9% in second quarter 2010 and 6.61% in first quarter 2009), many card issuers are less worried about continued charge-offs and are returning to risky borrowers as a way to make more money.
Banks first offered a handful of goodies -- like 0% APR on credit cards and cash for opening new checking accounts or credit cards --mostly to those with credit scores of 720 or higher. Now, more confident they won't be burned again, banks are moving on to the best of the subprime borrowers. The thesis, says Ulzheimer, is that this group isn't as risky as their credit scores indicate. Some borrowers, for example, might fall into this category because their credit lines were previously slashed or they fell behind on paying bills after a temporary job loss. For its part, an HSBC spokesman says the bank is "selectively increasing marketing activity" across its credit card business--including to subprime borrowers-- as "credit conditions improve."
It all adds up to growing credit card options for subprime borrowers. About one in four mail solicitations sent from issuers for new credit cards are sent to subprime and near-prime borrowers, according to direct-marketing data tracker Mintel Comperemedia. The pitch often offers solace, assuring such borrowers that they're entitled to a new beginning or that their blemished credit history doesn't mean they can't get a credit card, says Andrew Davidson, a senior vice president at Mintel.
Still, banks are hedging their risk with card terms that aren't all that favorable. The average interest rate for subprime accountholders is about 20%, up from 17.6% a year ago and nearly all of these cards come with an annual fee of $39 on average, says Odysseas Papadimitriou, chief executive of CardHub.com. (The exception is Capital One's Standard Platinum card that is fee-free the first year and $19 per year after that.) Average credit lines are relatively unchanged--and very low--at just $300 to $500, which means that even a meager shopping spree could ding a card user's credit score. On the plus side, getting a bigger credit limit takes less time: At least six consecutive months of on-time payments, down from about 12 months during the peak of the credit crunch.
Credit card analysts say these offers aren't ideal for everyone who gets them. For consumers trying to improve their credit score after a temporary setback, a secured card—where a borrower gets a credit limit equal to the amount of money he or she sends to the issuer--might be a better bet. Secured cards, which are also more available these days, have lower interest rates. And your activity on those cards is reported to credit bureaus just like regular credit cards, meaning consumers can build credit with on-time payments and low balances. The downside: Secured-card holders pay interest of at least 7.9% to essentially borrow back their own money. The only no-interest secured card, the Platinum Zero Visa, requires a minimum deposit of $500 and charges a $9.95 monthly fee. And once such a borrower's score rises to the 720 prime threshold -- usually in about two years -- those high-rate subprime card offers in the mail could give way to lower interest-rate card offers with larger credit limits.
