Published January 10, 2013
That blemish on your credit report isn't the budget-killer it used to be. Lenders are increasingly offering credit to "near-prime" consumers as they look for ways to bulk up their bottom line.
It's a reversal from the recession, when banks regularly turned away potential borrowers with lower credit scores. The reason is twofold: Consumers are getting better at paying their debts, and banks are under pressure to grow their accounts.
Relaxed lending standards led to the creation of 13.8 million new retail credit card accounts in the first five months of 2012, according to Equifax, a credit reporting bureau. That's a 10% increase over the same period in 2011.
Bill McCracken, chief executive officer of market research firm Synergistics, says that banks are reaching more broadly for customers because "Those who have sterling credit are only a small slice of the population." He notes that in 2011, there was a 41% increase in credit extended to near-prime borrowers with FICO scores of 660 and below.
These days, lenders are looking beyond your FICO score when trying to decide whether to lend you money. They're mixing in a variety of alternative data such as utility bills, cellphone records and rental history, says Eric Lindeen, marketing director for Zoot Enterprises, which conducts credit risk management for credit card companies.
Some also have decided to pay less attention to some of the older missteps in your past, Lindeen said. Instead of looking at three to seven years' worth of credit history, he said, many are focusing on shorter time frames of between one and three years, placing more emphasis on the most recent year.
"The good news is, there (are) a lot of issuers today who are looking to find those blemished consumers and give them an opportunity to get back into credit," Lindeen says.
Banks tend to bunch consumers according to the likelihood they'll pay back their debts. Those with the highest credit scores are considered "prime." If a borrower has a slightly lower FICO score, somewhere in the 600s, they're considered "near prime," says Ken Paterson, a spokesman for Mercator Advisory Group, which provides research and advisory services to the consumer payments industry. Below that level is a lower tier of higher-risk "subprime" consumers.
Paterson says issuers lending to near-prime borrowers with delinquencies and charge-offs are approaching "historic" lows, but they're doing so "very cautiously." In many cases, issuers are directing their riskier customers to specialized cards that will help them rebuild their credit records.
Secured credit cards, for example, are considered a good option to re-establish your credit, and most major banks offer them. They require a cash collateral deposit. Typically, if you have been diligent about paying your statement, the bank issuer will eventually convert your secured credit card to an unsecured credit card, McCracken says.
However, keep in mind that cards catering to the near-prime marketplace will probably carry higher interest rates. The average APR for prime cardholders is around 13%, but for subprime, McCracken says, you can expect around 20%.
Here are some of the major credit cards for near-prime consumers.
Cards for the near-prime
Lindeen warns that applying for more than a couple of these credit card offers will start to impact your credit score, so be judicious about which ones are right for you. Every point docked from your score matters because lenders tend to make their cutoffs at certain numbers. "Under 600, you're really looking at subprime," Lindeen says, "so if you're 599 versus 601, that will have an impact."
Another tip: Complete all your applications in less than two weeks because many lenders will treat the requests as one inquiry, Lindeen says.
To prop up your credit score, Equifax representative Michele Cacdac-Jones recommends timely payment of your bills and to keep your credit card balances at less than 30% of your total available credit. If you find that your balances are getting too high, reduce your household spending, create a budget, and contact your lender to work out payment arrangements.
You should also make an effort to keep an eye on your credit score, which you can monitor for free at AnnualCreditReport.com.
Copyright 2013, Bankrate Inc.