Steep competition for top-tier credit card customers has prompted card companies to look elsewhere for business, says a new report from credit reporting agency TransUnion. Many companies have switched their focus to consumers with less-than-stellar credit scores.
Scores Below 700 Acquire More Credit Card Accounts
A report released on Monday by TransUnion found that, in the three months ending September 30, credit card companies issued 25.2 percent of new accounts to consumers with credit scores below 700. This is up from 23 percent going to riskier borrowers in the same quarter of 2010.
According to TransUnion, a quarter of borrowers being issued new accounts translates to about a quarter million. Since the total number of credit card accounts opened during the quarter was essentially flat from a year ago, the credit reporting agency found the number of cards going to creditworthy consumers dropped.
Borrowers with scores of 800 or better only were given 45.9 percent of new accounts. This is a significant drop from 49.7 percent a year ago.
Customers with Lower Credit Scores Increase Profits
TransUnion’s findings were based on its VantageScore system for measuring creditworthiness. According to the agency’s scoring model, a score of 700 would merit a “C” on its VantageScore scale, indicating problems with making payments or running up balances in the past.
Shortly after the financial crisis, credit card companies shied away from consumers with troubled scores, tightened their lending standards for fear of not being repaid. However recently, the top five credit card issuers in the country– including MasterCard, Visa and American Express– have started shifting their standards.
While they continue to present enticing offers to consumers with the best credit scores (higher rewards, lower interest rates, low-interest balance transfers), competition has been very steep. For those who do acquire new accounts, they often pay their balances off in full every month, decreasing profits for companies.
By looking to card issuers with lower credit scores, companies are able to find borrowers who will be forced to pay higher interest rates based on their credit scores and are likely to carry a credit card balance each month, increasing profits.
For those looking to re-establish credit, increased interest from companies could be beneficial. However, it’s good to first explore credit card types and read offers carefully before diving in. As many know, it’s easy to fall into debt and hard to get out, so make choices wisely rebuilding credit.
