Subprime Customers Are Target for Marketing
A rise in foreclosures has caused a seemingly unlikely
reaction in the credit card industry. Few people can dispute the
fact that the majority of households that make up the subprime
market are in worse shape financially than they were in 2006.
Credit card issuers have taken note of the collapse that is
occurring in the subprime mortgage industry. According to Mintel
International Group, direct mail credit card offers increased
41% for the first half of 2007, while direct mail offers to
borrowers with the best credit actually declined 13%.
What they have noticed is that many debtors no longer have
the reasonable ability to refinance or take out home equity
loans. Underwriting guidelines have become stricter. Less credit
is available for mortgage lenders to issue. Furthermore, sagging
home prices are eating into homeowners' equity.
What has happened is that instead of stripping equity out of
their homes, debtors must increasingly rely on credit cards in
order to get by. This is not a fix, but it can help keep them
afloat for months or even years.
Credit card issuers know that if these homeowners cannot pay
their credit card payments, then they are likely facing
increased risk of foreclosure. Homeowners will typically max out
their credit cards in an attempt to avoid losing their homes.
Once credit cards are maxed out and homeowners cannot keep
up, then they begin defaulting on their mortgage. Homeowners
that know they are losing their home may stop making mortgage
payments altogether, which could leave more room in their budget
to get caught up on credit card payments.
The timing of all of these events will be one of the biggest
factors that will affect the bottom line of credit card issuers.
The process of foreclosure can frequently take up to six months
or more.
Mortgage lenders have some discretion as to how quickly they
foreclose on a property. The federal government is in fact
encouraging lenders to provide more options to help homeowners
avoid foreclosure.
Credit card issuers have no such flexibility. Guidelines
issued by the Comptroller of the Currency dictate that credit
card issuers charge off delinquent accounts after they fall 180
days past due. At this point, accounts are generally sold to
outside debt collectors.
Credit card issuers know two things that will justify such
risky lending behavior. First, subprime borrowers are far more
likely to incur fees by being late as well as going over the
credit limit. Such fees will boost the bottom line of credit
card issuers. These fees continue to increase, and they exceed
30% of total credit card revenues by some estimates.
Second, even if an account is sold to an outside collection
agency, the credit card issuer is able to recoup the vast
majority of the principal. Most of what they are charging off is
interest and fees. They are not looking at heavy losses on these
accounts. Those that do keep up with their minimum payments more
than make up the difference.
If mortgage lending is suffering, then the credit card
industry could easily profit from this increased marketing to
subprime borrowers. The real loser is the debtor that continues
to fall deeper in debt.
Still, there is relief for those that are stretched too thin.
Many of the same credit card issuers that are focusing on
subprime borrowers also sponsor debt management plans that can
help debtors get out of debt. Debtors that
get help soonest have the best
chances of keeping their home and their credit.
© 2004-2008 Vision Credit Education, Inc. All rights reserved.
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