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Credit card lending: bring on the tripping goldfish

by Peter Andrew

IndexCreditCards.com recently painted a less than flattering picture of credit card issuers that are again showering plastic on subprime borrowers (Credit card companies take leave of their senses--again). It implied that anyone with a connection to reality greater than that of a goldfish on LSD would recall just how much damage was done to lenders, borrowers and the economy as a whole the last time this trick was tried.

Credit card companies and the plot

Well, new research published Friday suggests that policymakers in many credit card companies are not only continuing to fail the carassius auratus-on-acid test, they're actually becoming less connected to reality. The Equifax National Credit Trends Report says that the number of new credit cards issued to subprime borrowers between January and May this year was 65 percent higher than during the same period in 2010.

Think bank executives can't get any more imbecilic? Well, there are subprime borrowers and really subprime borrowers, and card issuers are now engaging more with those toward the bottom of the pile. Equifax defines someone as subprime if their credit score is below 650, but reports recent growth in the number of credit cards given to people with scores below 600. Michael Koukounas, a senior vice president with Equifax takes a measured view of the situation, but even he seems to hint that all may not be quite right:

The gains made in the issuance of new bankcards for subprime borrowers are evidence of the continued easing that we are witnessing in underwriting. The rebound we are seeing in total new bankcard originations certainly provides some level of positive traction in the industry, but it should also be noted that we still have a long way to go to achieve a true return to normalcy for the market.
Credit card debt and the economy

For years before the credit crunch, it was clear that many subprime borrowers can keep on top of credit card debt when times are easy. It's when the going gets tough that the subprime get going broke. And, as Michael Koukounas appeared to imply, it's by no means certain that the short-term future doesn't hold some tough times.

Indeed, it was just last week that the the COUNTRY Financial Security Index found that Americans feel less financially secure now than they have at any point in the survey's history. And on Friday Moody's revealed that the rate of charge-offs (when card issuers write a debt off their books, and pass it to a collection agency) actually rose in July. To be fair, the rate at which people fell behind with their card payments dropped, but we know that credit card debt is rising again (see Credit card debt on rising trend), and it may not take much to see that rate increase again.

Credit card interest rates critical

Also last week, The Baltimore Sun reminded us of how vulnerable many borrowers are to hikes in credit card interest rates. It pointed to the fact that "almost all" credit cards now have variable rates, which can be increased pretty much at the whim of the issuing bank. That's because rates are usually calculated using two factors: the prime rate and the "margin," the second of which is at the discretion of individual credit card companies.

The Sun quoted one industry expert as saying: "...card issuers could increase the rate if consumers begin struggling, the economy weakens or banks see their profits shrink."

So what is going to happen to those subprime borrowers if and when credit card rates start going up? Who knows? But you can bet that banks will be the first to carp about them, preaching about the need for responsible borrowing while forgetting about responsible lending. After all, goldfish are a type of carp.

Published 08/23/11 (Modified 04/20/12)


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