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Below-prime borrowers drive credit-card growth

A customer enters their pin number while making a chip and pin payment using a Visa payment card.
Simon Dawson | Bloomberg | Getty Images
A customer enters their pin number while making a chip and pin payment using a Visa payment card.

In what might be considered a double-edged sword, the strengthening economy is boosting unsecured debt.

The number of credit-card accounts in the U.S. is rising quickly, thanks in large part to more riskier borrowers gaining access to credit for the first time since the Great Recession.

Ten million new consumers entered the credit-card marketplace in the last year alone, driving the total number of Americans with a balance on at least one credit card to 133 million, according to a recent Industry Insights Report from credit-scoring company TransUnion.

Just over half of the originations came from millennials in their 20s opening their first card. Including those accounts, 60 percent of new customers were subprime borrowers, meaning those with a credit score of 660 or below.

These are also the consumers who were affected the most by reduced lending during the recession and are gaining access to credit once again.

"The credit-card industry is very competitive," said Bill Hardekopf, credit card expert and CEO of Lowcards.com. "Issuers are always looking to gain new card holders, but most of the prime people — those with good credit and excellent credit — have credit cards. The subprime people are the ones that had their accounts closed during the economic downturn. That's where the greatest growth potential is now."

At the same time, a steadily improving jobs market and low unemployment has increased consumer confidence and spurred the demand for credit cards, according to Paul Siegfried, a senior vice president and TransUnion's credit card line of business leader. "Consumers tend to apply for more credit cards and use them more frequently when they are gainfully employed."

"Credit-card use is increasing in part because labor markets continue to improve," said Jess Sharp, executive director of the American Bankers Association's Card Policy Council. "Steady reductions in unemployment and faster wage growth have led to an increase in consumer spending."

Total balances have increased to $662 billion, up 6 percent from the same period last year, TransUnion said. But while riskier borrowers have been increasing their card balances, those in the prime and above-risk tiers are paying down debt, the company said.