Lenders are once again welcoming borrowers with less than pristine credit, a vote of confidence in the health of the US economy and Americans’ finances.
An estimated 29.2 million general purpose credit cards were issued to people with credit scores of 660 and below last year, according to projections by credit reporting firm TransUnion, up from 20, 4 million in 2020 and 26.3 million in 2019. This is generally the threshold where lenders consider consumers to have fair credit rather than good credit.
Even subprime borrowers, a group shunned during the pandemic, are finding it easier to get credit.
Lenders issued about 11.6 million general purpose credit cards to people with credit scores below 620 in the first nine months of 2021, according to the latest Equifax data, up 43.5 % over the previous year and the highest for the period recorded. (Equifax data goes back to 2010.) The overall spending limit on the cards has increased by 45% over the same period.
In the early months of the pandemic, lenders bracing for a tidal wave of missed payments tightened loan approval standards, excluding riskier borrowers from the market for new credit. But government stimulus measures and increased unemployment benefits have helped to lower credit card balances and stave off defaults.
Some 33% of banks said they had eased their credit standards for card approvals somewhat in the three months to early October, according to the latest survey of Federal Reserve loan officers, compared with about 4% a year earlier.
“The credit market is now more reminiscent of 2019, not the early stages of the pandemic,” said Paul Siegfried, head of credit cards and payments at TransUnion. “Despite the increase in the number of new accounts for subprime borrowers, we observed that balances for subprime borrowers remained relatively stable, a sign that consumers are not taking too much risk.”
The loosening is reflected in credit card interest rates, which have risen because lenders issue more cards to people with lower credit scores who are charged more to account for their higher risk of default.
The average annual percentage rate, or APR, on interest credit cards hit a near record high of 17.13% in the third quarter, from 15.91% in the first quarter, according to the Federal Reserve, before dropping to 16.44% in November. .
Credit card APRs are generally based on the prime rate plus a margin set by the lenders. The prime rate fell to 3.25% in March 2020 and has not moved since, but margins have increased. Lenders averaged 13.19 percentage points on interest-bearing credit cards in November, down from 13.03 points a year earlier and 12.13 points two years earlier, according to an analysis of Fed data by WalletHub.com.
Lenders are welcoming borrowers with lower credit scores to boost credit card profitability, which fell in 2020 to the lowest level since 2009, the Fed said.
Credit card balances remain below their pre-pandemic levels, totaling $808.6 billion for general purpose and store cards in November, compared to $913 billion in January 2020, according to Equifax. Smaller balances generally mean that lenders receive less interest income.
Balances have increased in recent months, according to issuers, but many cardholders are still making larger monthly payments than usual. Lending to people with lower credit scores in a healthy labor market is a way for banks to increase their profits without taking on too much additional risk.
“We find that issuers are much more inclined to go subprime,” said Odysseas Papadimitriou, chief executive of WalletHub.com. “They have lowered the market more where the margins are bigger and the interest rates are higher.”
This story was published from a news agency feed with no text edits
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