Lenders more understanding of consumers with low credit scores

Lending to subprime borrowers - those with a consumer credit report score of 660 or below - has risen steadily in the past year as banks are becoming more forgiving of score blemishes due to the recession, Fox Business reports. Looking to drive loan growth, the amount of new credit extended to U.S. consumers grew by 10 percent to $782 billion last year. Also, the number of new bank cards issued to consumers with subprime credit rose by 41.4 percent to 12 billion during that same time period. "Banks want to lend because that's where they make money," said Amy Crews Cutts, senior vice president and chief economist for Equifax, as quoted by the news source. "Consumers want to borrow. If they're cut off ... then it just makes the management of their financial lives more difficult." More financial intuitions are acknowledging that the recession has played a large role in the rise of subprime borrowers, and that some consumers who previously paid their loans off on time are now placed in that category because they suffered monetary setbacks. As such, banks are now more open to providing loans to those who exhibited good credit behavior in the past but also have one or two "credit scars" from a "hardship event" such as job loss, explains the media outlet. "I definitely am hearing frustration, especially among folks who had really good credit before the economy blew up," Gerri Detweiler, director of consumer education for Credit.com, told the news source. "They're frustrated because they're not used to having to pay the kind of interest rates that are associated with these subprime loans." For instance, the average interest rate for a credit card granted to someone with subprime credit was 23.64 percent, far greater than the national average of 15 percent. However, Detweiler explains that despite the increased rate, a subprime loan can be the very thing that helps consumers move out of subprime, because they will be able to establish a positive payment history. Yet, a recent Moody's Investor Services report was not as optimistic about the future of subprime lending. "Although the average credit quality of cardholders improved in the recent recession because issuers charged off weak borrowers at record levels, the improvements will dwindle, and the charge-off rate will find a floor of around 4 percent by fourth-quarter 2012 or first-quarter 2013," Moody's said in the report.