Monday, December 13, 2010

Higher Risk Lending Returns

Some credit card issuing banks have begun to lend again to higher risk borrowers - but at a higher cost. The article notes "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"

This is encouraging. After all, we simply don't know the circumstances surrounding many credit card defaults. It's one thing if a person got hammered by the recession - losing their job and subsequently any income stream - and failed to pay their credit card debts. It's entirely another situation if someone just stopped paying because they charged too much and got in over their head with debt. The person in the former situation may be a worthy borrower now, provided they have a job and a means to pay off their debts. The person in the latter situation requires a bit more scrutiny, so it's good to see that credit card companies have begun to wise up and analyze their credit risks more (as they should have been doing all along!)

I do draw solace from the fact that the article notes "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."

Hopefully, those higher interest rates and annual fees will act as a deterrent for those borrowers who had no plans of paying off their new credit cards and instead encourages only serious borrowers. If that's the case, more capital can flow safely through the economy and we will have avoided the mistakes that got us into the financial crisis in the first place.

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