Credit loosens up for subprime consumers


By Jennifer Waters, MarketWatch

Last Update: 12:01 AM ET Jun 27, 2012

CHICAGO (MarketWatch)Good news for those with less-than-stellar credit scores: Banks are finally opening the lending spigots to you, too.

Lending is slowly opening up for subprime consumers, said Daryl Toor, a spokesman for credit bureau Equifax. Subprime, by Equifaxs standards, are those with credit scores below 660.

But banks dont seem to be returning to the heyday of unbridled lending to consumers who couldnt afford the debt they were taking on. Its not an easy get. Lenders are making smarter decisions with more strict criteria in opening credit to these consumers than in the past, Toor said.

It will cost you more, too. Good credit always begets good interest rates. Bad or mediocre credit scores will up your interest rates as much as 5 to 10 percentage points, according to Ben Woolsey, director or marketing and consumer research at, a division of

They are pricing those accounts much higher out of the gate, he said. Thats also tied to the 3-year-old credit-card legislation that prohibits card issuers from raising rates for the first year in which the account was open and then doing it only on new purchases.

In the past year, lending to subprime consumers shot up 41%, hitting a four-year high in December as bank credit growth grew across the board, according to Equifax.

Credit-card issuance to consumers with VantageScores in the 601 to 700 range jumped 21% in the first quarter compared with the year-ago period. It represented the highest year-over-year spike since 2008, according to Experian, a credit bureau.

The amount of credit extended for consumers in that credit score range is on the rise as well, reversing the downward slope that started in 2008, Experian noted. Its now peaking over $1,500, on average.

High-risk consumers, or those whose credit scores are below 600, are still stuck as credit continues to tighten for them.

Not everyone should get credit because not everyone pays it back, said Ezra Becker, vice president of research and consulting at credit bureau TransUnion. In other words, low credit scores are still a huge cause for risk concern.

Meanwhile, delinquency rates declined, hitting a 17-year low, giving banks more comfort and financial leverage to start courting the near- and subprime borrowers who have been left out since the start of the recession in 2008.

Discover, for example, last week raved of historic lows as delinquency rates over 30 days past due fell to 1.91% from 2.79% in the latest quarter. Uncollectable loans, which banks charge off, took a bigger dive, down to 2.79% from 5.01%.

Total consumer debt in the U.S. now stands at $11 trillion, and thats an 11.5% drop from its 2008 peak of $12.4 trillion, according to Equifax. Much of that, some $8.6 trillion, comprises mortgages, with $2.38 trillion primarily in credit cards, auto and school loans.

As consumers have battened down the financial hatches, theyve eliminated 7.3% of personal debt, or $187.8 billion since topping out at $2.57 trillion in 2008.

Typically, people with poor credit scores fall into one of two baskets: they destroyed their scores themselves by missing payments, maxing out credit cards, filing for bankruptcy and any other financial mayhem or they have limited credit histories, such as college students and new immigrants.

When the recession hit and jobs were axed, hordes of people who once had great, even acceptable personal financial management skills saw their scores nosedive as money woes piled up.

Now as banks are back on more financially stable ground, coupled with the Federal Reserves promise that interest rates wont inch up before 2014, they have room to pull in those who didnt make the credit-score cut after 2008.

A credit score between 620 and 659 is now generally considered an average credit score when in previous years it would have been considered poor, said Michael Germanovsky, a credit-card expert at, which reviews credit and personal finance services.

Banks understand that many Americans have weathered years of high unemployment and a bleak economic outlook, he said.

Indeed, as banks look to new sources of revenues, they are more understanding of consumers who lost jobs and ruined their credit scores in the process but are working to improve them.

The pie of nonprime space also has grown. In 2010, nearly 22% of new card originations went to consumers with VantageScores below 700. Last year, it swelled to about 24% and is holding steady at that rate so far this year, Becker said.

It helps too that the default rates have dropped considerably for those in the 700-range, said Sarah Davies, senior vice president of analytics and product management at VantageScore Solutions, which has a generic credit-scoring model used by all the nations top three credit bureau scores.

Someone who has a credit score of 700 has had a pretty good shift in how likely they are to default, she said. In prerecession 2005, that risk factor was at 1%. It peaked in 2009 at 7% and is now down to 3%.

The world has gotten better and risk has calmed down, she said. Banks are now able to take that 850 score that they had in 2009 and bring it down to 750 and then some. Prime, or middle of the pile, Davies said, is at 700.

TransUnions Becker said a stepped-up marketing effort is also priming the pump. A lot of consumers dont look for credit because they arent getting offers for credit, he said.

Lenders are increasing their marketing effortsand that right there tends to drive increased interest in credit among consumers, he added. You think about whats in front of you.

Competition has also prompted lenders to relax some underwriting criteria as they wrangle for market share.

Those people who were caught in the void between prime and subprimeand they were probably the most displaced during the recessionare the ones who are seeing the fruits of loosening credit, CreditCard.coms Woolsey said.

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