Credit Card Companies Look to Risky Borrowers to Boost Revenue
Banks are starting to rely more heavily on risky buyers to boost their revenues, with 3.7 million in subprime credit cards being approved and distributed during the first quarter of the year. That represents a 39% increase over the same period last year, according to Equifax data provided to the Wall Street Journal. It is also the highest volume since the economic decline of 2008.
During that time, about one in every three credit cards issued were going to subprime customers.
Randy Hopper, vice president of consumer lending at Navy Federal Credit Union, told the Wall Street Journal. “Lenders in general have really saturated the higher-credit-quality market, so it is only natural that as they look for growth opportunities, they expand downward.”
Subprime borrowers pay higher interest rates, which translates into more revenue for the banks. These borrowers also have a tendency to only make minimum monthly payments on their cards, which further increases their interest payments.
The average interest rate for subprime borrowers in the first quarter was 21.1%, which is almost a full percentage point increase from the 20.2% average a year earlier. By comparison, low-risk borrowers paid an average of 12.9% interest in the first quarter.
Subprime borrowers are considered those with FICO or Equifax Risk credit scores below 660. These borrowers may have bad payment histories, bankruptcies or limited credit in their past. Lenders are now looking to them to generate more revenue for the future.