Shauna Ames is a 41-year-old office manager from St. Paul who, like countless other Americans who filed bankruptcy, received a credit card offer from Capital One. While it is certainly common for individuals filing Chapter 7 or Chapter 13 bankruptcy to begin receiving multiple offers for credit cards, Ames told the New York Times that she was surprised by the offer because the company had just won a lawsuit against her for $5,485 in overdue credit card debt last September. “I still can’t believe it,” Ames told the Times.
According to the story published April 10, 2012, “Capital One is one lender that has been courting borrowers with damaged credit, even those who have just emerged from bankruptcy, with pitches like, ‘We want to win you back as a customer.’” Indeed, the Times reported that credit card lenders gave out 1.1 million new cards to borrowers with damaged credit in December. According to a credit trends report from Equifax, that is up 12.3 percent from the same month the previous year, while credit scoring firm Experian said the same borrowers accounting for 23 percent of new auto loans in the fourth quarter of 2011 was a 17 percent increase from the same period in 2009.
“It’s clear that we are returning to business as usual,” former Federal Reserve bank examiner Mark T. Williams told the Times. As the article noted, high interest rates paid by subprime borrowers—up to 29 percent, according to the Times—and a tendency to incur fees for late payments makes these borrowers attractive targets for credit card companies. Furthermore, people who recently came out of a Chapter 7 bankruptcy are also attractive to lenders because credit cards likely helped these individuals get into debt and now they will be unable to file again for eight years if they start accumulating new credit card debt. However, as the Times also reported, “Some former banking regulators said they worried that this kind of lending, even in its early stages, signaled a potentially dangerous return to the same risky lending that helped fuel the credit crisis.”
While lenders claim they have learned to distinguish between “chronic deadbeats” and “fallen angels”—individuals with good payment histories before the economy’s nosedive caused them to fall behind—the trend of risky lending should be a red flag. There are millions of Americans struggling to pay their bills and support their families, but it is important for these individuals not to make a bad situation worse. Credit card debt that spiraled out of control has led many of my clients into my office, and this week I will focus on responsibly using credit cards. Whether or not you have filed Chapter 13 or Chapter 7 bankruptcy, it is important for everyone to understand whether the handful of immediate problems a new credit card may temporarily solve will only lead to bigger and deeper financial issues later.