Dinged credit? Card issuers are happy to lend

Guido Krzikowski | Bloomberg | Getty Images

Consumers with dinged credit are back in a borrowing mood, and lenders are more than happy to give them new credit cards, according to new data.

Since the Great Recession ended five years ago, consumers have been gradually taking on more debt and lenders have been accommodating them, easing up on tighter standards.

Much of the growth has been in so-called non-revolving credit, especially car loans, thanks to record low interest rates. But revolving credit—mainly in the form of credit cards—is picking up. And the biggest growth in new credit cards is coming from so-called subprime borrowers whose credit scores are less than 660, according to the latest Equifax data.

Through July of this year, banks handed out cards to 9.8 million subprime consumers, a six-year high and an increase of 43 percent from the same period last year. Another 7.8 million cards have been issued to subprime borrowers by retailers this year, up 13 percent from 2013 to an eight-year high.

Lenders are also giving subprime borrowers higher credit limits. Bank-issued card limits jumped to $12.7 billion for the first seven months of the year—up 4 percent from the same period a year ago to a six-year high. Retailers lifted their card limits by 16 percent to $6.8 billion, an eight-year high.

Part of the growth is the result of an easing of the tighter standards that followed the 2008 credit bust after the boom of the early-2000s. Now that banks have repaired the damage from billions of dollars in bad debts, they're better able to take on more risk. A stronger job market is also putting more consumers in a borrowing mood, according to economists at Wells Fargo.

"Consumers are feeling increasingly confident about the economy and may be more comfortable making purchases with credit cards as a result," they said in a recent note on consumer credit.

With the Federal Reserve offering up a steady supply of cheap money to lend, credit card issuers are doing a booming business expanding their customer base.

JP Morgan Chase, the largest card issuer by purchase volume, told investors last month that credit card sales volume grew 12 percent to $120 billion in the latest quarter compared with a year ago. Credit card balances rose 2 percent to $127 billion.

As they hand out more accounts and higher limits to consumers with lower credit scores, though, lenders face a higher risk that they won't get paid back. Some card issuers are bracing for a fresh round of bad debts by setting aside more in reserve to cover the cost of charging off unpaid card balances.

In its latest earnings call with analysts and investors, Capital One Financial said it would boost its loss provision by 17 percent, saying it expects to expand that cushion as it continues to expand its lending.

"We think the (current) charge-off rate is an unsustainable low point and that losses are headed up from here," Capital One CEO Richard Fairbank told investors. "Longer term, loan growth will start to impact the charge-off rate in 2015. As new loan balances (age) they will start putting upward pressure on losses."

American Express also boosted third-quarter loss reserves by 16 percent, and Discover boosted its provision for loan losses by 17 percent compared with a year ago.

But card companies are banking on profits from issuing new credit cards more than offsetting those higher loan losses. Low loss rates aren't a credit card issuer's main goal, according to Discover CEO David Nelms.

"You don't necessarily maximize your profits by having your charge-offs too low, and not growing, and not booking new loans," he told American Banker.