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Risky Borrowers Find Credit Available Again, at a Price

Credit card offers are surging again after a three-year slowdown, as banks seek to revive a business that brought them huge profits before the financial crisis wrecked the credit scores of so many Americans.

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The rise is striking because it includes offers to riskier borrowers who were shunned as recently as six months ago.

But this time, in contrast to the boom years, when banks “preapproved” seemingly everyone, lenders are choosing their prospects more carefully and setting stricter terms to guard against another wave of losses.

For consumers, the resurgence of card offers, however cautious, provides an opportunity to repair damaged credit and regain the convenience of paying with plastic.

But there is a catch: the new cards have higher interest rates and annual fees. Lenders are “tiptoeing their way back into the higher-risk pool of customers,” said John Ulzheimer, president of consumer education at SmartCredit.com.

In extending credit again to riskier borrowers, lenders are looking beyond standard credit scores, on the theory that some people who may seem to be equivalent credit risks on the surface may show differences in spending or other behavior — like registering on a job Web site — that suggest variations in their ability to keep up with payments.

Industry consultants, in their attempt to feed the demand for finer classifications of borrowers, have coined new labels to describe different borrowers with similar credit scores.

One is “strategic defaulters,” whose credit scores were damaged because they walked away from a home when its value dropped below what was owed on the mortgage. These borrowers made a bad bet on real estate but may otherwise be prudent risks because they make a good living.

Similarly, “first-time defaulters” once had a strong credit record but ran into financial trouble during the recession. Typically, these borrowers fell behind on some sort of loan payment after losing a job, not from taking on too much debt.

By contrast, there are “sloppy payers,” who pay only some bills on time; “abusers,” who are defiant about paying; and “distressed borrowers,” who simply do not have the means to pay.

The goal is to weed out the latter groups to identify consumers whose credit scores are blemished but who still have the money to pay their bills.

“Lenders want to prove to themselves that it is worth taking a higher risk,” said Brad Jolson, an executive of the decision management company FICO, who has helped several card companies analyze their customer base.

This new approach to assessing default risk is emblematic of the challenge faced by the many banks that were hobbled by the financial crisis: They desperately want to grow again, but the memory of a near-death experience makes them wary about taking outsize risks.

Lenders have taken $189 billion in credit card losses since 2007, according to Oliver Wyman Group, a financial consultancy.

That was a significant part of the $2 trillion or so that banks are estimated to have lost since the crisis began, and a contributor to the government bailout of the banking system.

To stem losses, lenders halted new card offers to all but their most affluent customers. At the same time, more than eight million consumers stopped using their credit cards, in a sign of the nationwide belt-tightening, according to TransUnion, the credit bureau.

Millions more borrowers who still have cards have been compelled to pay down their balances, or are more often choosing to use cash. That has had a big impact on lenders’ bottom lines.

Credit cards once gave the banking industry as much as a quarter of its profits; today those profits have all but vanished and lenders are seeking ways to replace them.

Now that the losses have stabilized, lenders have set out to revive their card businesses, and mail offers to riskier borrowers are roaring back.

HSBC mailed more than 16 million card offers to this group in the third quarter of this year, Citigroup 14 million and Discover 10 million, all roughly tenfold increases over the same period last year, according to Synovate Mail Monitor, a market research firm.

Capital One’s rate rose fiftyfold, to 22 million. Many of the new lower-end cards start with high interest rates and annual fees, because new federal rules limit the ability of lenders to change the terms after payments are missed.

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Capital One, for example, is offering low-end cards that carry interest rates of 18 percent or higher and annual fees of up to $50.

In all, lenders will send about 2.5 billion credit card offers by the end of the year, Synovate estimates, compared with more than six billion in 2005, the peak year.

The bulk of this year’s mailings are still going to affluent people, with just 17 percent going to borrowers with blemished credit. That compares with about 39 percent in 2007 and a low of 7 percent in late 2009.

The response to the card campaigns has been strong, with roughly 4 percent of these riskier borrowers submitting applications.

That is about 10 times the typical response rate for the group, though that may be partly explained by the absence of offers over the last two years.

After racking up more than $17,000 in credit card charges, Sue Talkington, 69, a retired saw mill worker living in Modesto, Calif., started working with a credit counselor in September to start paying down her debt.

Then, last month, right after she had cut up three credit cards, she received an application for a new Capital One card, the second pre-approved mail offer she has received recently. She says she was stunned.

“I’m trying to get out of debt, so why would I want a credit card to get into more debt?” Ms. Talkington asked. “It really shows me how much greed there is out there,” she added.

Card issuers “aren’t interested in helping me get back on track with a credit card,” she said. “They just want my money.”

Since the mass marketing of credit cards began decades ago, lenders have waited for years to extend credit to borrowers like Ms. Talkington who have fallen on hard times — a process sometimes called “rehabilitating the customer.” But these days, rehab is happening faster because the lenders cannot afford to wait.

Citigroup is testing a credit card with training wheels, known as CitiMax, devised for customers whose credit was damaged by the recession.

Borrowers are required to link their credit card account to a checking, savings or brokerage account so that Citi can withdraw money if a payment is missed.

Branch workers for Bank of America and Wells Fargo are steering more customers denied a traditional credit card toward “secured” cards, backed by a deposit that the owner is not permitted to touch.

Wells says that more than a third of secured cardholders receive a traditional credit card after 12 months.

“I graduated, as they call it, to the unsecured,” said Joshua Hoglan, 26, a college student from Las Vegas who says he became a more responsible borrower after making timely payments on a Wells secured credit card he applied for in early 2008.

He called graduation “a great relief.”

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