Bad habits from credit cards once again

It would be worthwhile to think about how the whole economic crisis began at the first place. In an oversimplified version it will suffice to say that banks and creditors lent money to those people who couldn`t afford to pay back. When the money owed wasn`t paid back the whole system collapsed. But, patterns indicate that we are going back to the same mistake once again. That is because credit card issuers and banks are once again providing credit cards to people who have bad credit scores or a bad credit history. As it has been pointed out by many experts of the industry, since the beginning of recession in 2007, creditors have lost a whopping 189 billion dollars on their credit cards, a big reason why some of them needed a bail out.

However, riskier borrowers are once again being enticed by banks and lenders who want to prove to themselves more than anyone else that the risk is worth taking. For example, in recent times, Capitol One gave out as many as 22 million card offers to those customers who have a bad credit score. HSB gave out 16 million new cards. Citigroup and Discover have give out 14 million and 10 million new cards respectively. All in all, as many as 2.5 billion new credit card accounts would have been opened this year. The percentage of people who would be getting the new credit cards without deserving them is 17% which has more than doubled. It was just 7% last year. One might wonder what is leading to this massive change.

According to creditors, some people saw their credit scores dropping rapidly because of the decline in real estate prices and also unemployment. However, these offers are not typical credit card applications. The banks are behaving smartly and one must understand that the new cards will cost them through higher interests and higher fees.

The credit card offered by Capitol One, for example, has an APR of 18% and an annual fee of 50 dollars. Bank of America, Citigroup and Wells Fargo are all offering secured credit cards, where the cards would be associated to the bank accounts to which the banks have access to. Although risky, these card offers are being lapped up by the customers. This is because lot of people find it hard to make do without the credit card. In fact it is a basic necessity for some people.

Bryant Park

Bryant Park is a financial consultant for one of the companies listed on Wall Street. He writes on a variety of topics ranging from credit cards to different loans that can be availed by consumers. He holds a bachelor degree in Financial Services from Dartmouth College.