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Credit card offers go subprime again

by IndexCreditCards IndexCreditCards


Credit card companies' losses

Over the last week or so, this blog has explored the problems that credit card companies are having in rebuilding their profitability. The mountain facing them has now been brought more sharply into focus by a survey from America's Research Group that found that only 20.8 percent of consumers are using their credit cards this holiday season, compared with 29.7 percent this time last year. This tends to support studies by TransUnion that suggest that eight million Americans have completely stopped using their cards.

The New York Times highlighted on Sunday the scale of the problem facing card issuers. It quoted figures from a financial consultancy, the Oliver Wyman Group, that said that credit card companies' losses since 2007 have totalled $189 billion, which is 9.45 percent of the $2 trillion lost by the banking sector in total. The Times contrasts that with the companies' pre-recession heydays, when they contributed up to a quarter of their parent banks' profits.

Credit card offers up

The pain of the credit crunch seemed to register with card issuers for a while. Some months ago, this blog reported data from Synovate Mail Monitor, a market research service that monitors mailed credit card offers, which said that 349.1 million such solicitations were dispatched in the second quarter of 2009. However, by the same quarter this year, that number had jumped to 640.3 million, and Synovate expects 2.25 billion to be mailed in the whole of 2010.

Now, that's still way down on the pre-credit crunch years, but the the upward swing is unmistakable. And now another trend is coming to light: offers are beginning to go to people with blemished credit reports. Just a few months ago, card issuers would have shunned many of these.

Credit cards more widely available--but is that good?

To be fair, card companies are being selective in targeting their solicitations. They're going beyond credit scores, and trying to analyse the reasons why individuals encountered debt problems. Of course, this sort of segmentation remains an inexact science, but, by attempting to differentiate between those who had a short-term problem that has now been resolved and those who are serial defaulters, they may be on to something. Needless to say, those with less than stellar credit scores can expect to pay much higher fees and/or credit card rates.

The trouble for credit card companies is, some might think, that those consumers who are most keen to take on a new card may be precisely the ones who shouldn't have one. The sensible, prudent ones who had their fingers burned are less likely to want to risk repeating the experience than those for whom deferred gratification and self-discipline are alien concepts.

Secured credit cards an alternative

One way forward for those who have recently become averse to debt (and for those who are still yet to qualify for an ordinary card) is to sign up for one of the many secured credit cards that are widely available. These provide the convenience of unsecured credit cards--but without the credit.

That's because you have to deposit a sum upfront, which becomes your credit limit. So you're only ever spending your own money. Of course, you ultimately get your deposit back, either when you cancel the card or when the issuer upgrades you to one of its traditional, unsecured credit cards.

Published 12/14/10 (Modified 12/19/13)

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