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July 3rd, 2014 at 8:07 am

Credit card lenders pursue subprime borrowers

credit cards

A third of all credit cards issued in the first quarter were to subprime customers.

Banks and other lenders are wooing risky credit-card borrowers more aggressively than they have since the financial crisis in a bid to jolt revenue in a period of sluggish growth and tight regulation.

 

 

Lenders and banks have issued 3.7 million credit cards to so-called subprime borrowers during the first quarter, a 39% jump from a year earlier and the most since 2008, according to data provided exclusively to The Wall Street Journal by credit bureau Equifax Inc.

About one-third of all credit cards issued in that period were to subprime customers, the biggest share in six years, according to Equifax.

“Lenders in general have really saturated the higher-credit-quality market, so it is only natural that as they look for growth opportunities, they expand downward,” said Randy Hopper, vice president of consumer lending at Navy Federal Credit Union, an institution based in Vienna, Va., that is the largest credit union in the U.S.

At a time when many other revenue engines are sputtering, subprime borrowers are especially attractive to banks because they tend to pay higher interest rates and generate more revenue as long as they don’t stop making their minimum required payments.

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The average rate for such customers was 21.1% in the first quarter, up from 20.2% a year earlier, according to research firm CardHub.com. In contrast, the highest-quality borrowers paid 12.9% on average in the first quarter, virtually unchanged from a year earlier.

Subprime borrowers are typically defined as those with FICO or Equifax Risk credit scores below 660 on scales that top out at 850. Such borrowers often have missed payments on debt, suffered foreclosures, filed for bankruptcy protection or have no credit history.

Stephanie Sannar said she and her husband, Toby, of Colorado Springs, Colo., sold their home for less than they owed on their mortgage in 2012. Mrs. Sannar, 42 years old, an emergency-room nurse, said her credit score fell to about 650 following this process since the mortgage was in her name.

Still, the couple has been receiving many credit-card offers in the mail, and Mrs. Sannar said she recently signed up for a Citigroup Inc. credit card with a credit limit of about $15,000.

“I was surprised they’d give so much,” she said. “The credit-card offers come every week.”

“When evaluating potential customers we consider a number of factors, and FICO is just one dimension,” said a Citigroup spokeswoman. The bank said it focuses on “high-quality acquisitions and loan growth” and that its subprime acquisitions have been consistently down on a year-over-year basis.

U.S. banks posted a 4% decline in net operating revenue for the first quarter from a year earlier, according to the Federal Deposit Insurance Corp. The fall in revenue has been driven by plunging mortgage lending and a drop in trading activity.

In the credit-card business, new regulations make it harder for lenders to pursue certain practices that historically have generated billions of dollars in revenue. Among other things, the Credit Card Accountability Responsibility and Disclosure Act of 2009 makes it more difficult for issuers to jack up interest rates on existing balances.

Bank executives said part of their goal is to reach out to consumers who fell on hard times in the financial crisis but now are in a more stable position.

Richard Fairbank, chief executive of Capital One Financial Corp., a financial holding company based in McLean, Va., said at an investor conference last month that many card companies target subprime customers. He referred to some of them as “fallen angels” and “the accidental subprime.”

During the last recession, rising unemployment led to a surge in late payments, and banks nearly shut off lending to borrowers with less-than-stellar credit records. Now, however, borrowers of all stripes are having an easier time repaying their debts, reducing the risk of subprime lending and emboldening banks to venture back in. According to the Equifax report, which excludes credit cards that can only be used at retail store chains, the portion of card accounts that were 60 days or more past due fell below 1% in May, the lowest rate since 2005.

Charge-offs, or losses from unpaid credit-card debt that banks have declared uncollectable, fell 13% to $27.7 billion in 2013 from a year earlier, according to data from the Federal Reserve compiled by CardHub.com. At the peak in 2009, charge-offs totaled $85.4 billion.

Adam Wasdin, 31, of Raynham, Mass., said he has been behind on payments for about a year on four of his private student loans. He said he was surprised to see credit-card offers suddenly arrive in the mail from lenders including Bank of America Corp. and J.P. Morgan Chase & Co. over the last six months.

A J.P. Morgan Chase spokesman said that individuals who receive applications in the mail may not necessarily be approved for a credit card. Bank of America declined to comment.

Mr. Wasdin, a distribution driver for a local newspaper in the area, said he hasn’t signed up for any of the offers and is sticking with his debit card.

“It went from nothing to offers maybe once a month,” he said. Mr. Wasdin is reluctant to check his credit score because he figures it is low given his missed payments.

“My credit score is probably terrible,” he said.

It isn’t clear how long banks will keep wooing subprime borrowers. The Fed’s April survey of senior loan officers found lenders anticipate growth in outstanding loans to their most creditworthy customers this year, but only “a smaller net fraction” of banks expect more growth in loans to nonprime borrowers.

Wells Fargo & Co., the fourth-largest U.S. bank by assets, had more than $2.1 billion in credit-card balances with borrowers whose FICO scores ranged from 600 to 639 in the first quarter, up 9% from a year earlier and 18% from two years earlier, according to company filings. A spokeswoman said these balances account for 8% of the bank’s credit-card balances, a figure that hasn’t changed from the end of 2011.

At J.P. Morgan, the largest U.S. bank by assets, credit-card borrowers with FICO scores below 660 accounted for 16.3% of the bank’s credit-card balances during the first quarter, up slightly from a year earlier and the first year-over-year increase in at least two years. A bank spokesman said many consumers are in a better financial position now to handle credit-card debt.

Capital One, a major subprime credit-card lender and the ninth-largest U.S. commercial bank by assets, has reported that about one-third of its U.S. credit-card balances belonged to borrowers with FICO scores of 660 or lower or who had no score by the end of the first quarter, according to company filings.

A Capital One spokeswoman said the bank lends to all types of consumers and its strategy is to provide reasonable access to credit with safety measures to help cardholders stay on track and build their credit.

“You’re starting to see an environment where issuers are feeling more comfortable to extend credit,” said Jason Kratovil, vice president of government affairs for payments at the Washington-based Financial Services Roundtable, which represents financial-services institutions. “Even though [those borrowers] could be considered subprime, they’re still creditworthy.”

Via Wall Street Journal

 

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