Subprime Credit Card Borrowing on the Rise

Mike Ginsberg

Credit and collection professionals fixated on the CFPB and other regulations may be overlooking a significant developing trend that could pave the way to sustainable increases in placement volumes and improvement in liquidation results from a critical market segment.

Recent reports strongly support that lenders are once again pursuing risky credit-card borrowers more aggressively than they have since the financial crisis in an effort to expand revenues in a period of stalled growth and tight regulation. Banks and credit-card companies issued 3.7 million credit-cards to subprime borrowers during the first quarter, a 39% jump from a year earlier and the most since 2008, according to data provide by 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.

Newly imposed regulations have made it near impossible for lenders to extend credit to subprime borrower and to pursue certain practices that historically have generated billions of dollars in revenue. These changes have directly impacted the amount of new business available to debt buyers, collection agencies and other service providers in the US ARM industry focused on this asset class. Credit-cards were widely regarded as the leading source of new business for ARM companies for more than a decade leading up to the financial crisis. Since then, ARM companies that built major businesses focused on this market segment have been fighting to survive.

Early indications are positive. Richard Fairbank, chief executive of Capital One said at an investor conference last month that many card companies are again targeting subprime customers. Capital One 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. Wells Fargo 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.

During the great recession, rising unemployment led to a surge in late payments and banks responded abruptly by nearly shutting off lending to borrowers with less-than-stellar credit records. As economic conditions have slowly improved, unemployment levels have dropped, consumer confidence has improved and borrowers are generally having an easier time repaying their debts, reducing the risk of subprime lending and paving the way for banks to venture back in. The results support this trend. 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.

As we start the second half of the year, we are not out of the woods yet but market conditions are starting to restore confidence levels for credit and collection professionals focused on the credit-card market segment.

Have a happy and safe July 4th holiday. Here’s to the great U.S. military that protects this great country and fights for our freedom every day.