Credit Card Offers Abound for Subprime Borrowers – But at What Cost?
It seems as though credit card companies are trying their best to push homeowners with subprime mortgages closer and closer to foreclosure or bankruptcy.
Struggling homeowners who have subprime mortgages are now being bombarded more than ever with direct mailings of offers from credit card companies. Credit card companies are now targeting their direct mailings to subprime borrowers, rather than making the effort to obtain new customers who have good credit histories. During the first half of 2007, offers for high interest credit cards were mailed out to consumers with poor credit scores at a rate 41% higher than the first half of 2006.
As the default rate on subprime mortages continues to rise and more families are facing the reality of foreclosure, credit card companies are taking the opportunity to prey on those who are financially desperate and will accept credit card offers with impossible terms and the highest legal interest rates.
Credit card companies know that people with good credit can pick and choose and be very selective about rates and terms when opening new credit accounts. They also know that people who are struggling financially and possibly even facing foreclosure on their homes can't be picky and will often take what they can get.
They also realize that mortgages are harder to get now, due to the falling price of homes nationwide and subprime lenders filing for bankruptcy left and right. Homeowners in peril can no longer easily refinance because their home equity is gone. Credit cards are the only option for these families in financial trouble to get their hands on cash, and this fact is not overlooked by credit card companies.
At the same time as credit card companies decidedly upped their efforts to draw in people who are struggling financially, the default rate on the subprime mortgages that many of these people have steadily rose.
During June, 2007, almost 1 in 5 people with subprime mortgages were more than 60 days past due with their payments and 1 in 20 subprime mortgages were in foreclosure.
Consumer advocates are worried, and rightly so, that by targeting subprime mortgage customers the credit card companies are hurting rather than helping homeowners.
Travis Plunkett, the legislative director of the Consumer Federation of America said, "This causes us great concern that some major credit card issuers are marketing to people who are in a risky financial position. It's another sign that some credit card issuers are engaging in risky, irresponsible lending to vulnerable consumers."
Earlier this year Plunkett testified to Congress that research shows that the late fees charged on credit cards issued to subprime borrowers are sometimes more than the interest payments.
Borrowers are considered subprime if they have a past credit history of making late payments, or skipping payments all together. These are the customers that credit card companies are making their offers to, knowing that if and when they are late the penalties and interest will add up quickly. Credit card companies love late payments, as the late payment fees are the easiest money they can make. They also love customers who are only able to make minimum payments on their accounts, as this allows the interest and their profits to build up.
But are the credit card companies taking too much of a risk by giving credit accounts to so many subprime borrowers? After all, unlike a mortgage, credit card debt is unsecured debt. That means that if the borrower doesn't pay, it can be a total loss for the credit card issuer.
Industry analysts say that the companies issuing the credit cards know what they are doing. They have elaborate programs to screen applicants and determine fees, interest rates and credit limits. Many banks relaxed their standards for credit card approval this year as mortgage lending standards tightened up.
It seems that one way or another they want the money of subprime borrowers. And for now, they are getting it.