More lending insanity, this time it is credit cards for subprime borrowers
In an interesting article in Seeking Alpha, Some Banks Never Learn, Markham Lee said, “A recent article in the Boston Globe discusses how banks have increased the number of credit card offers direct towards subprime borrowers, whilst decreasing the number of offers directed towards prime borrowers over the same time period.”
In a post I wrote recently, “Why are mortgage lenders continuing to get in trouble”, I commented to a reader, “The problem with predatory subprime lending was simple greed, the lenders thought that they could make more money loaning to less credit worthy people by charging a higher interest rate but that only works if the loan is paid.”
It looks like a few banks are calculating they can make extra money on their credit card operations by focusing on borrowers they can charge a higher interest rate to. Once again, it only works if the borrower doesn’t default.
In another interesting twist, I noticed a report saying that borrowers who were delinquent on their mortgage payments were continuing to make their credit card payments. This is the opposite of conventional wisdom and historical trends. Previously, borrowers prioritized their payments toward making mortgage/rent and car payments first and paying credit card debt last.
Perhaps, they are thinking that if they lose their house, they might need a credit card to get them through the tough times ahead or they possibly are thinking the government will eventually bail them out of the mortgage mess they and many others find themselves in and that they should stay current on their credit cards.