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

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.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't 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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information