Increasing Use of Credit Cards by Subprime Borrowers
The number of subprime borrowers who are obtaining a new credit card is growing at a significant rate. Roughly half of subprime borrowers—those with a credit score of 620 or less—now have a credit card compared to 60% in 2007, which means the number of credit card holders in this category is returning to pre-recession levels.
The new report, which was provided by Liberty Street Economics and the Federal Reserve Bank of New York, indicates this group is acquiring the greatest number of new cards because they were most heavily impacted by the recession. In 2010 and 2011, nearly half of all credit card closures affected this group, even though they only represented one-third of credit card customers.
While those with low credit scores are opening the most accounts, they are getting the least amount of credit. The average limit on their new cards is $1,000. Borrowers with scores between 720 and 779 are granted about $5,500 in credit, and those with scores over 780 receive an average of $8,000. This means about 72% of the total credit extended is going to borrowers with scores over 720.
“Although new cards are disproportionately issued to lower credit score borrowers, the overall extension of new credit, measured by increases in aggregate credit limits, continues to go overwhelmingly to those with credit scores above 720,” the researchers wrote.
The overall use of credit cards has increased since the economic downturn. Measured by the share of individuals with at least one card, participation reached 68% of borrowers in the second quarter of 2008. It then declined to 59% during the Great Recession. Over that time period, banks closed accounts, the Card Act of 2009 resulted in reduced lending to younger borrowers, and consumers deleveraged. Since 2013, the credit card participation rate has increased to 61%.
The report also showed that the credit card delinquency rate is decreasing, returning to the low levels seen in 1999.
“The downward trend is consistent with the movement in credit extensions toward borrowers with higher credit scores as well as an improvement in overall economic conditions,” the report said.