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


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. 

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