Lower score borrowers get bigger slice of credit

[November 15, 2011]  NEW YORK (AP) -- Fierce competition for top-tier credit card customers appears to be leading some banks to look in elsewhere for new business: borrowers with spotty credit histories.

Data shows that more new cards went to consumers with less-than-stellar credit scores in the third quarter, while fewer new cards went to those with the best scores.

In the three months ended Sept. 30, credit reporting agency TransUnion found that 25.2 percent of the new card accounts went to consumers with a score below 700.

That was up from 23 percent of cards going to riskier borrowers in the same quarter of 2010.

That translates into almost a quarter million more cards going to consumers who have had some trouble with credit in the past, according to Ezra Becker, vice president of research and consulting in TransUnion's financial services business unit.

And since TransUnion found that the overall number of cards opened during the quarter was essentially flat from a year ago, that means those were cards that did not go to more creditworthy consumers. In fact, the number of new card accounts opened by borrowers with scores of 800 or better slipped to 45.9 percent, from 49.7 percent a year ago.

The findings were based on the VantageScore system for measuring creditworthiness developed by TransUnion and its peers Experian and Equifax as an alternative to the better-known FICO score. VantageScore says its system, which uses a scale of 501 to 990 and awards higher scores to the least risky borrowers, is used by the top five credit card issuers in the country.

Like FICO, VantageScore's ratings are based a number of factors regarding an individual's past use of credit, including their history of making on-time payments, keeping balances below credit limits and the length of their credit history.

Scores around 700 would merit a "C" on the VantageScore scale, which implies that those borrowers had some problems making payments or ran up balances in the past.

Opening up new credit to struggling consumers is an important step. A year ago, TransUnion said about 8 million people had left the credit card market in the prior 12 months, either by choice or because their cards were shut down.

The uptick in lending to consumers who have had trouble with payments in the past "counteracts everything that's been happening in the last few years," said Bill Hardekopf, CEO of the card comparison site LowCards.com. He noted that demand is high for consumers in that group because of the dearth of available credit in recent years.

Meanwhile, card companies have been pushing ever-more-enticing offers to consumers with the best scores -- beefing up rewards, trimming interest rates and lengthening the time for no- or low-interest balance transfers. About 80 percent of all new card offers go to those with the top credit scores, according to market research firm Synovate.

But those same top-tier borrowers aren't trying to open as many new accounts or increase their balances. "They have plenty of credit available to them," Becker said, noting that card users have been paying down their balances. In the third quarter, TransUnion found the average combined balance on bank-issued credit cards -- MasterCard, Visa, American Express and Discover -- fell 4.1 percent to $4,762, from $4,964 last year.

Data from credit card companies also shows that while the most affluent consumers are using their cards more, they're also paying off their balances in full each month.

That means that to increase profits in their card businesses, banks need to find new borrowers who will pay higher interest rates and are more likely to carry balances each month.

"If financial institutions are going to grow, eventually they're going to have to dip their toes into the water of riskier borrowers," said Greg McBride, senior financial analyst for Bankrate.com, which tracks credit offers.

Another factor that's likely playing into more willingness to lend to consumers with lower scores is that there are more individuals on the riskier end of the scale due to the lengthy economic downturn, high unemployment and ongoing foreclosure crisis, noted Bruce McClary, a spokesman for ClearPoint Credit Counseling Solutions. "Sooner or later the people who got bumped out of the credit world have to start re-establishing credit," he said.

One problem is that the increase in higher-risk borrowers also had an immediate impact on the rate of late payments during the quarter.

TransUnion found that the rate of payments late by 90 days or more -- known in the industry as the delinquency rate -- rose to 0.71 percent, from 0.60 percent in the second quarter.

That's still down from 0.83 percent in the third quarter a year ago, and a long way off from the 1.32 percent peak in delinquency recorded in the first quarter of 2009.

Although the delinquency rate in the third quarter was still below the historical norm -- the second-quarter rate was the lowest seen since 1994 -- it marks the first quarter-over-quarter increase in almost two years.

"When you have such low delinquency, there's generally only one direction you can go," Becker observed. Plus, lenders must take risks if they want to earn anything. If lenders wanted to achieve zero delinquency, he said, they would have to stop lending.

The expansion of new card offers to riskier borrowers also present an interesting bit of timing for the industry, notes Hardekopf.

Card companies "want to get these cards in their hands so they have the ability to use them during the holiday season," he said. "The time when we all put more on our cards is the fourth quarter."

[Associated Press; By EILEEN AJ CONNELLY]

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