Banks issuing more credit cards to sub prime borrowers

Many Americans are pulling those credit cards out of mothballs, dusting them off, and swiping again. Banks hope customers won't stop there. The number of credit cards issued by banks has increased. Many of those cards are going to borrowers with less than perfect credit.

It really boils down to competition. Banks are already competing fiercely for borrowers with high credit scores. So, in order to increase their revenue, they're lending to more people with varying credit scores. ABC 33/40 spoke with a business expert who says we better get used to this trend.

"As far as the use of these cards by people with lower credit scores, I think that's a long term, upward trend," said Stephen Yoder, a business professor at the University of Alabama Birmingham.

He says, for banks, lending equals profit.

"The way banks make money on lending is to have what is called a net interest margin. That is the amount they charge you the borrower has to be more than the amount they're paying to borrow money themselves," said Yoder.

The number of new cards issued to consumers in 2011 rose by more than 20 percent from the previous year. 24 percent of those new cards went to people with below prime credit scores. Why would banks take the risk?"There are many banks who have expressly said they are going to expand that part of their business even though it creates more risks. But if they can price it at interest rates appropriately to compensate them for that risk, it can be a win," said Yoder.

This trend has already carried over into 2012. In the first quarter of 2012, again, 24 percent of new cards issued went to high risk borrowers. But, even with lenders practically throwing themselves at consumers,{} many Alabama residents remain cautious. "I get those credit card things in the mail all the time and they're saying 'you have this rate for this amount of time'. So what do you do to those you get in the mail? you shred them," said one Birmingham resident."I have post office box on the south side and they go straight from the post office box to the trash can at the post office," said another resident.

Yoder says caution is good, financial literacy is even better. And when it comes to risky lending, all is not doom and gloom."The good news is that recently delinquency rates have begun to go down on credit cards. That's a bit of good news considering that the amount of debt has gone up but the percentage that are delinquent has gone down," said Yoder.

He says banks have a tough economy ahead of them. Generally speaking, businesses have not been borrowing as much, so they have to lend to someone. That's why they're turning to consumers. What that really means is they are depending very heavily on the retail market.

Alabama is still among the top five states with the worst delinquency rates.