Everywhere you look these days, it seems economists and financial experts are pointing to signs of a slow and steady economic recovery, including recent figures showing a seasonal spike in consumer savings and spending. Unfortunately, another indicator of the economic upturn is showing up in the mailboxes of many American households this holiday season: credit card offers.
In part one of this two-part series, we’ll look at the reason for this credit card “season:” banks and credit card companies are finally bouncing back following an extended the economic downturn, during which many card issuers were reluctant to take on new borrowers, and the inception of the Obama Administration’s Credit CARD Act, which tightened the reins on the credit card industry treated customers. Now, with interest rates and fees adjusted for new laws and a new spending landscape, credit card agencies are officially back in business and ready to solicit yours, even if you are a beleaguered borrower.
According to The New York Times report citing this latest credit offer news, “Credit card offers are surging again after a three-year slowdown, as banks seek to revive a business that brought them huge profits before the financial crisis wrecked the credit scores of so many Americans.”
But the real story is not that offers are rising, but to whom offers are being sent; in this case high-risk borrowers and debtors seeking a second chance to improve their credit. According to The Times, “The rise is striking because it includes offers to riskier borrowers who were shunned as recently as six months ago. But this time, in contrast to the boom years, when banks “preapproved” seemingly everyone, lenders are choosing their prospects more carefully and setting stricter terms to guard against another wave of losses. For consumers, the resurgence of card offers, however cautious, provides an opportunity to repair damaged credit and regain the convenience of paying with plastic. But there is a catch: the new cards have higher interest rates and annual fees.”
In the process of offering to these types of debtors, companies are seeking more palatable labels for American borrowers who otherwise would be considered “risky” applicants. What has emerged are new labels to describe different types of borrowers saddled with similar credit scores:
Many Americans credit scores were dimged as they walked away from underwater homes during the mortgage meltdown. These borrowers made a bad bet on real estate but may otherwise be better risks in a credit card company’s mind because they make a good living.
Similar to the “strategic” lot, “this group once had a strong credit record but ran into financial trouble during the recession. Typically, these borrowers fell behind on some sort of loan payment after losing a job, not from taking on too much debt.”
By contrast, those deemed “sloppy payers” only seem to pay some of their credit card bills on time.
This group, unceremoniously known as the “abusers,” represent a group that is often fed up with their financial situation and, as a result, are defiant about paying their credit card bills (on time or otherwise).
Finally, there is the all-too-familiar “distressed borrowers” who simply do not have the means to pay their mounting credit card bills. This group became common during the economic downturn and remains hard-hit during our more recent economic malaise. Many of these borrowers are also find themselves bankruptcy bound, as an alternative to draining their savings and retirement, and as an attempt to stave off the effect of unemployment or a drop in income.
If you fall into one of the first two categories of strategic and first-time defaulters, you are the very groups being targeted by credit card companies and banks, as these industries seek to replace credit card customers in order to redeem profits lost during the recession, even as “Millions more borrowers who still have cards have been compelled to pay down their balances, or are more often choosing to use cash.”
In part two of this series, we’ll look at these very newly-austere borrowers and how they’re affecting the credit card crunch.
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