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Credit Card Applications » News » Other » Lenders are now willing to take a risk with subprime borrowers

Lenders are now willing to take a risk with subprime borrowers

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Lenders are now willing to take a risk with subprime borrowers

Mailboxes and inboxes are flooded with credit card offers as lenders are willing to take a risk with the risky borrowers. This is largely due to the reduced delinquency rates, and credit card companies are seeing this as a fresh opportunity and are willing to take a chance.

The increase in subprime lending is not limited to credit cards only, banks are on their guard while lending to subprime borrowers. According to the Wall Street journal they are targeting only the best of the subprime borrowers who have a FICO score of 620 to 660.

The subprime market generates a lot of revenue for these banks, and that is one of the major reasons that issuers find them so appealing. These individuals generate much more income by way of late fees, annual fees etc for the banks and they are actually better than the credit-worthy customers. These individuals are also charged a higher rate of interest and hence these are valuable customers for the banks.

Banks play a key role in helping these customers make some bad decisions and then capitalizing on the same, to make profit out of them. On an average, the lenders earn around 70% of the revenue out of these subprime customers. This is at least 22% more than the revenue they earn from prime customers. This has been found out by R.K. Hammer Investment Bankers.

The Card Act was designed for the consumer protection, where they would be protected from interest hikes, fees, and other charges. It is evident however, that the Card Act has done more harm than good as lenders are trying different ways and means to retain revenue. Many banks such as Citi, are actually increasing their offers to entice borrowers and still manage to increase interest rates by finding loopholes in the Card Act. For example, although the Citi Platinum Select MasterCard has an 18-month introductory period on balance transfers it still doesn’t make sense as the last tier of the APR has been raised to 20.99% which is unusually high. Hence the drawbacks far outweigh the benefits.

Lenders see the subprime borrowers as less of a risk as the delinquency rates have gone down. It is believed that subprime borrowers go down with their scores, due to circumstances like temporary job loss, or missing bill payments, all not caused by bad financial management.

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