Banks to expand credit card, auto lending for subprime consumers

In recent months, many of the nation's largest credit card lenders have been expanding efforts to issue cards to subprime borrowers, and that trend is expected to continue in the near future.

Over the remaining months of the year, 38 percent of bank risk professionals expect said the nation's major lenders to significantly expand credit card issuing efforts to include more subprime borrowers, according to a new survey by the Professional Risk Managers' International Association on behalf of the Fair Isaac Corporation. However, half of those surveyed said they thought the biggest area of expansion would be auto loans, while another 12 percent said they thought mortgage lending would most significantly broaden qualifications.

Part of that may be attributed to consumers now feeling they have the financial wherewithal to begin borrowing once again, and many are now seeking auto loans for new cars for the first time in years, the report said. At the same time, though, Dr. Andrew Jennings, the chief analytics officer at FICO and head of its FICO Labs division, warned that in many cases underwriting for many types of loans, and mortgages in particular, will likely remain fairly tight even as they expand somewhat. As far as home loans are concerned, lenders likely remain cautious when it comes to this loan type because of the investment involved and the cost of dealing with instances of delinquency and default.

At the same time, less than half of those surveyed said they thought that lending to subprime borrowers would remain flat over the remainder of the year, the report said. Though 44 percent felt this way, much of that may be attributed to the expected continual drops in all kinds of loan delinquency over the next six months.

Experts believe late payments will continue to dive
In all, 77 percent of experts said they thought auto loan delinquencies would continue to slide, while 73 percent felt the same way about late mortgage payments, the report said. In addition, 72 percent predicted small business loan delinquency would dip, while 69 percent responded similarly when asked about credit card payments.

"I see these results as quite positive, save for student lending," said Jennings. "Last quarter we saw a sharp uptick in sentiment regarding consumer credit, with more respondents expecting things to improve than we had seen at any point in the previous two years. Now lenders are expecting things to at least stay the same, and quite possibly improve further. These results indicate that bankers believe consumer health has turned a corner."

FICO believes that the reasons for these experts predictions are twofold, the report said. First, consumer finances are improving and have been for some time now, giving them greater flexibility to pay all their bills on time and in full, and emboldening them in their desire to take on new lines of credit, which they now believe they can afford. And second, because the improving finances are granting borrowers the ability to get a better handle on their accounts and outstanding balances, the general quality of consumers' credit standings has been climbing.

Though many experts have been predicting that instances of delinquency and default, particularly on credit cards, would have to tick up at some point in the near future, it now seems that some are backing off that prediction. The basis for earlier expectations of increases in credit card delinquency is that rates have fallen continually for more than a year and are now well below historical averages. In fact, for many lenders, delinquency and default rates are now at all-time record lows.

These trends are what prompted many financial institutions to significantly expand lending efforts so that subprime borrowers had access to credit that tightened appreciably during and immediately following the recent recession. That in turn increased the risk for future delinquency and default rate upticks, but to this point, many borrowers with diminished credit scores seem to still be approaching their accounts with caution, making sure to pay their bills on time.

However, at the same time, recent statistics from the Federal Reserve Board show that the amount of credit card debt carried nationwide increased significantly in May, the latest month for which consumer credit data was available. This may indicate that consumers are feeling better about the state of their personal finances, but also increases the risk of delinquency and default in the near future.

Making sure to pay all loan bills on time and keep balances on credit cards low is crucial if you want to raise your credit score. Those two factors alone make up 65 percent of your credit score and therefore play a major role in your overall financial health.

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