Bad Credit? You Can Borrow Again — for a Price

Handful of credit cardsBanks just a few years ago were handing out cards and extending lines of credit to just about everyone, a decision that came back to haunt them in a major way when borrowers, beset by job losses and falling home values, began defaulting in huge numbers. Banks battened down the hatches and severely curtailed their lending, extending credit to only the most affluent customers or those with near-perfect credit scores.

Recently, though, it seems that banks are once again engaging Americans with blemished credit. The number of solicitations sent by mail has increased significantly, according to a report in the New York Times. HSBC, Citigroup and Discover are all sending out 10 times as many offers as they did a year ago, while Capital One is sending out 50 times as many. The number of offers going to riskier borrowers has gone up 10 percentage points in only a year, although the number of offers is still much smaller than five years ago. As the article points out, these offers aren't exactly generous; one Capital One card being marketed to people with troubled credit, for example, carries an 18% interest rate and a $50 annual fee.As always, the availability of more credit is a mixed blessing for Americans, particularly those who have suffered financial hardships of late. No longer being locked out of the credit market can be a boon for people who have gotten back on their feet and are trying to rebuild their finances, but if someone's financial strife stemmed from poor money management skills, or from entrenched joblessness that still exists, more credit could be only a temporary fix, leaving these borrowers in an even deeper hole.

Banks are being more careful in their rationing of credit this time around, targeting only those they believe can make payments (such as "strategic defaulters" or people whose credit was temporarily dinged when they relied on cards between jobs). Some banks aren't taking any chances; the New York Times reports that a new Citi offering requires the user to link the card to a deposit account, so the bank can go in and help themselves if the cardholder doesn't pay on time.

"Consumers need to re-enter the world of credit with caution, particularly if they've had a financial hiccup in their past," says Gail Cunningham, spokesperson for the National Foundation for Credit Counseling. "Having too much available credit equals temptation," Cunningham tells WalletPop.
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