According to an article in the NYTimes.com, lenders are once again looking to offer financing to those with less-than-optimal credit. They aren’t necessary talking about lenders offering home loans, this is referring to lenders offering credit cards to bad credit risks.
Today, more than anytime in the past 75 years, there are a lot of people with bad credit scores. Those people have been seeing their opportunities to borrow money dwindle. When the real estate market collapsed in 2008, many credit card companies reigned in the levels of credit that they were willing to offer to people. In some cases, they took that further — they eliminated the credit options for people. That left those people in the unfortunate situation of basically just having cash as an option. Of if they really needed a loan, they were left with lenders looking to offer loans to people with bad credit — sometimes referred to as payday lenders.
Now that trend amongst traditional lenders is starting to change.
But as financial institutions recover from the losses on loans made to troubled borrowers, some of the largest lenders to the less than creditworthy, including Capital One and GM Financial, are trying to woo them back, while HSBC and JPMorgan Chase are among those tiptoeing again into subprime lending.
Credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December, up 12.3 percent from the same month a year earlier, according to Equifax’s credit trends report released in March. These borrowers accounted for 23 percent of new auto loans in the fourth quarter of 2011, up from 17 percent in the same period of 2009, Experian, a credit scoring firm, said.
So as the economy brightens, lenders are reaching out to those people with poor credit and offering them the opportunity to obtain a credit card. As the article indicates, more than 1.1 million new credit cards were offered to people who have poor credit in December 2012 alone. This will afford these people a much greater opportunity to operate in today’s society.
If you are among those people who have been given the opportunity, we suggest that you take it slow.
Consumer advocates and lawyers worry that the financial institutions are again preying on the most vulnerable and least financially sophisticated borrowers, who are often willing to take out credit at any cost.
“These people are addicted to credit, and banks are pushing it,” said Charles Juntikka, a bankruptcy lawyer in Manhattan.
We agree, a lot of people are addicted to credit. If a lender offers you the opportunity to borrow money, you should proceed cautiously. Once you have a credit card, you do not need to borrow the entire credit limit. In fact, we strongly suggest that you only borrow what you can afford to repay each month.
What most people do is to make the minimum payment each month. That means that you will be paying (likely) a considerable amount of interest for an extended period of time until you pay off the item(s) that you purchased. When people are addicted to credit, they might not actually pay for the item for years due to their small monthly payments and the associated interest charges.
Those people who have poor credit may be fortunate enough to be getting credit cards now, but since they have poor credit, they will likely pay higher rates of interest than those people who have good credit. So while the bad credit borrowers may be getting new credit opportunities, if they aren’t paying off their credit cards each month (that is, if they are carrying a balance) and paying high levels of interest, it’s the lenders who are benefiting, not the borrowers.
The banks, for their part, are looking to make up the billions in fee income wiped out by regulations enacted after the financial crisis by focusing on two parts of their business — the high and the low ends — industry consultants say. Subprime borrowers typically pay high interest rates, up to 29 percent, and often rack up fees for late payments.
If you have poor credit, you should do everything that you can to improve your credit score. Obtaining credit cards for bad credit might not be the best option for you, unless you intend to behave fiscally responsibly – that is, to pay off your credit card balance each month. If you do this for several months in a row, you will see your credit score rise. Once is rises, you will be able to drop your credit card for bad credit risks and obtain a more traditional credit card (presumably) with better terms.
source: nytimes.com
