Credit Card Issuers Increase Limits For Subprime Borrowers; Raise Concerns About Risks

As the economy continues to improve, credit card issuers have begun to loosen their vice grip on lending standards in order to raise borrowing limits for consumers. But the move to provide extend credit to those with blemished histories has raised concerns with consumer groups.

The Los Angeles Times reports that banks have more readily raised borrowing limits for credit card customers in recent months, despite the fact that many of those consumers asking for increases are considered amongst the most risky borrowers.

In fact, according to a Federal Reserve Bank of New York survey, credit card firms approved 76% of all requests from cardholders for higher borrowing limits in February.

Analysts say the willingness to extend addition credit to consumers comes at a time when bank and credit issuer revenue has fallen because of tighter regulations and low-interest rates.

The loss of profit, coupled with other factors such as smaller loan losses, labor market stabilization and consumers’ desire to spend more have combined to create an environment more accommodating to lending.

“Credit card issuers are feeling a lot better about the economy and their position,” Bill Hardekopf, chief executive of LowCards.com, a credit card comparison website, tells the L.A. Times. “They want to generate some new business.”

However, it’s the way in which these banks have tried to generate new business – by approving credit increases for subprime borrowers – that worries consumer advocates.

Nearly half of the subprime borrowers – those with credit scores less than 680 – who applied for increased limits were approved in February.

In the past, subprime borrowers have faced higher interest rates and fees because they are considered riskier borrowers.

Another report from the American Bankers Association confirmed the trend in increased subprime borrowers, finding those cardholders are taking on more debt than any other category of borrower.

“Credit cards are very useful for many people,” Lauren Saunders, managing attorney at the National Consumer Law Center, tells the L.A. Times. “But it’s way too easy to get in over your head, and we do worry about extending too much credit to people who should be trying to live within a budget instead of taking on more debt.”

In contrast, those in the banking industry say there’s never been a better time for consumers to seek out additional credit, especially since the approvals are for current cardholders, not new accounts.

“You already know what they’re doing,” Christine Pratt, a senior analyst with Aite Group, tells the L.A. Times. “You know what they look like. It’s not like you’re going out and grabbing new ones.”

Even though cardholders likely understand their obligations, analysts at Standard & Poor’s Investor Service say the looser lending standards will likely also increase missed credit payments in the future.

An increase in missed payments could then translate into an upswing in credit card delinquencies, which have fallen sharply over the past three years.

Banks raising credit card borrowing limits for subprime customers [The Los Angeles Times]