Banks Loosening Credit for Subprime Consumers
Good news for those with less-than-perfect credit scores: banks are finally opening the lending doors for subprime consumers.
But banks don’t seem to be blindly plunging into lending to the consumers who can’t afford the debt they are taking on. Lenders are making smarter decisions: they strict criteria in opening credit to these consumers.
Usually banks price bad and mediocre accounts much higher than those with perfect score. That’s also tied to the credit card legislation that prohibits card issuers from raising rates for the first year in which the account was open.
High-risk consumers, or those whose credit scores are below 600, are still a huge cause for risk concern. Typically, people with poor credit scores fall into two categories. The first is for those who destroyed their scores themselves by missing payments, exceeding limits, filing for bankruptcy and any other financial disorder. The second is for limited credit histories, such as students and new immigrants.
When the recession hit and jobs were axed, hundreds of people who once had great, even acceptable personal financial management skills saw their scores swoop as money misery piled up.
Today the credit score between 620 and 659 is generally considered as an ‘average’ credit score when in previous years it would have been considered as a ‘poor’. The credit-card issuance to such consumers jumped 21% in the first quarter compared with the same period a year ago and the amount of credit extended for consumers in that credit score range is on the rise as well (according to Experian).
It seems that banks understand that many Americans suffered for years from high unemployment and depressing economic outlook. For example, as banks look to new sources of revenues, they are more understanding of consumers who lost jobs and ruined their credit scores in the process but are working to improve them.
Now, as banks are more financially stable, they coupled with the Federal Reserve’s promise that interest rates won’t inch up before 2014. Also the default rates have dropped considerably for those in the 700-range.
Competing for market share the lenders prompted to relax some underwriting criteria and now those people who were trapped between prime and subprime are the ones who are seeing the benefits of loosening credit.