Credit Card Offers Are Everywhere, But That May Not Be a Good Thing

A marketing blitz by card issuers is signing up risky borrowers as well as those with stellar credit

Jul 13, 2014 at 1:21PM

Credit
Flickr / Philip Taylor.

Lenders have been bombarding American households with credit card offers this year, with nearly 1 billion mailed in just the first quarter of 2014 – up year over year by a hefty 65 million. Considering that there are only about 115 million households in the U.S., this was quite a feat. 

While many are heading to consumers with enviable credit scores, others are targeting those whose credit is much less commendable. For the first time since the financial crisis began, approximately 33% of new credit cards were placed in the hands of subprime borrowers, those with credit scores under 660. By comparison, the most credit-worthy customers generally have scores between 725 and 850, where the scale tops out.

What is prompting this party atmosphere? A recovering economy and brighter jobs picture are surely part of the reason, as well as the fact that banking revenue from other areas such as mortgages has become almost nonexistent. This last factor makes subprime borrowers, who usually pay much higher interest rates than prime customers, especially attractive. 

So far, so good
Another good sign is that credit card delinquencies have been decreasing as the economy heals, and Fitch Ratings has noted that its 60+ Day Delinquency Index is currently at its lowest point since 1991, when the agency first began tracking this metric.

That's swell news for the likes of Visa and MasterCard, which dominate the offerings of huge card issuers like JPMorgan Chase (NYSE:JPM) and Bank of America (NYSE:BAC), whose coffers will also benefit. That is, of course, as long as customers keep paying the monthly minimum balance. 

A long-standing courtship
Despite the massive charge-offs of credit card debt during the Great Recession, banks have been courting subprime borrowers since 2011, when the first half of the year saw a 64% increase in card issuance to subprime customers, compared to the year previous.

Surprisingly, banks were not gun-shy in this regard, as you might expect after the massive charge-offs of credit card debt undertaken during the prior years: $85.6 billion for 2009, followed by another $77.1 billion in 2010. Apparently, banks were willing to forgive, and forget.

It seems to be working, at least according to Fitch. But change may be in the air, and banks like JPMorgan and Bank of America might find themselves again facing delinquent credit card accounts.

For one thing, a recent study by TransUnion has found that a particular payment behavior born out of the financial crisis is ebbing – that of consumers paying their credit card bills ahead of their mortgages.

CardHub's 2014 Credit Card Debt Study also presented some dour news concerning credit card debt. The report noted that consumers have historically paid down their card debt in the first quarter of the year, applying year-end bonuses and tax refunds to the cause.

This behavior has changed over the past two years, however. In both 2013 and 2014, first-quarter pay down activity was less than in previous years, even as consumers became more indebted.

Could banks be looking at another credit card delinquency fiasco soon? Possibly. Though subprime borrowers would be most at risk of defaulting, they remain a small percentage of banks' credit card loan portfolios. For JPMorgan Chase, subprime makes up a little over 16% of all card accounts; Bank of America's portfolio makeup is unknown. 

Still, trouble may be brewing, if the sheer number of offers being slung around is any indication. Even with a signup rate of only .5%, many more subprime borrowers are obtaining cards each quarter. As the mortgage crash showed, debt crises are often years in the making – and subprime borrowers are always involved. Have banks forgotten the lessons of the financial crisis? Time will tell. 

Your credit card may soon be completely worthless
The plastic in your wallet is about to go the way of the typewriter, the VCR, and the 8-track tape player. When it does, a handful of investors could stand to get very rich. You can join them -- but you must act now. An eye-opening new presentation reveals the full story on why your credit card is about to be worthless -- and highlights one little-known company sitting at the epicenter of an earth-shaking movement that could hand early investors the kind of profits we haven't seen since the dot-com days. Click here to watch this stunning video.

Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends Bank of America, MasterCard, and Visa. The Motley Fool owns shares of Bank of America, JPMorgan Chase, MasterCard, and Visa. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers