According to a recent report compiled from data on consumer trends collected by TransUnion, one of the three major credit bureaus, the number of individuals missing credit card payments is on the rise. The information shared by the credit bureau shows that nearly 3% of revolving balances on newly issued credit cards is 90 days or more past due, compared to the 2.2% reported for 2014 and 1.5% for 2013. When missed payments for newer credit cards are added into the nationwide mix of revolving account balances, the average delinquency rate rises to 1.53%, representing the highest percentage in the last four years.
While there are a number of factors that contribute to missing a credit card payment or two, the recent data from TransUnion shows a clear correlation between the rise in delinquencies and a trend among a number of credit card issuers. Subprime lending – the practice of offering revolving credit accounts to less than well-qualified borrowers – is partly to blame.
The Subprime Debacle
It is hard to forget the consistent headlines throughout 2008 and 2009 connecting the dramatic downturn of the economy with common but dangerous practices of lenders throughout the country. The subprime market, including borrowers without verifiable income, with poor credit history or score, or no credit whatsoever, was booming up until the recession began, with lenders across nearly all verticals handing out new loans, credit cards, and mortgages to the masses. As the recession started its stark decline, subprime lending took a backseat to fixing a broken system.
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However, in 2014 as the broad market showed signs of steady growth, a surge in credit card offers to subprime consumers took place. According to the Wall Street Journal, more than 20 million credit cards were issued to subprime borrowers in 2015 alone. This represented a 20% increase from 2014 and a 56% increase from 2013. The reason? The subprime market is a profitable endeavor.
Although not all subprime borrowers are destined to mismanage their credit accounts, there is a higher propensity that late or missed payments will take place compared to prime or super-prime accountholders. Credit card issuers understand the risk of offering credit to an individual with a spotted credit history, but they also realize there is an opportunity for additional revenue. This is because subprime credit cards often carry a variety of fees (hint: you should look for credit cards without fees), including charges for the following:
- Late payments
- Increasing the credit limit
- Maintenance fees (either monthly or annually)
- Over the limit fees
- Processing fees
Some card issuers tack on one or more of these fees at the time a new credit card is approved, meaning a subprime borrower is already in behind by the time the card arrives in the mail. Because individuals with less than perfect credit are often issued a low-limit credit card to start, the potential to go beyond their limit is high when these fees are present. The subprime consumer with a brand new credit card meant to help build a better history of financial responsibility is instead digging himself out of a hole within the first few months after account opening. The increase in missed credit card payments is inevitable with this system of subprime lending in full force.
In addition to subprime lending practices, the Wall Street Journal reported that ancillary factors play a role in the rise of missed credit card payments. According to data reported earlier in 2016, unemployment rates in specific business sectors, such as energy and oil, have been on the rise in certain states, including Texas, Oklahoma, and Wyoming. Without a steady income, it is nearly impossible for borrowers to maintain on-time payments for outstanding debt balances, especially revolving accounts like credit cards.
To add to the difficulty, most credit card issuers aren’t prone to allowing payments to be deferred or skipped altogether, unlike lenders that provide personal loans, mortgages, or auto loans. The increase in the unemployment rate and the combination of stringent repayment terms, then, can be linked to more missed payments among consumers residing in states with substantial energy and oil sector jobs markets.
There is widespread concern that subprime lending will continue well into the future, without many changes taking place to better protect consumers. Part of this prediction is based on the fact that individuals with lackluster credit histories have a pressing need to correct the problem; employers, utility companies, lenders, and other direct and indirect creditors all take a close look at a person’s credit profile to determine his or her degree of financial responsibility. Without strong credit, securing a new home, vehicle, or job is a true challenge.
The unfortunate truth is that new credit is a necessary component of repairing poor credit history, but accounts have to show prospective creditors a strong track record of on-time payments and responsible use. The fees associated with subprime credit cards create a vicious cycle of debt which ultimately results in more missed payments, additional black marks on a credit report, and less opportunity for new credit down the line. If delinquencies on credit cards are going to move in the opposite direction in coming years, creditors need to release their tight grip on the subprime market and consumers need to have a better understanding of how missed payments have a lasting effect on their financial lives.