If you have good credit you’re more likely to be eligible for a credit card as opposed to if you have bad credit and therefore bad spending habits. If you have bad spending habits you may go over and will have to pay the banks more money, so why aren’t they more interested in those with bad credit?
In: Economics
Banks already tried focusing on entirely people with bad credit leading up to 2008 (sub prime mortgage crisis) and it blew up the entire economy.
There were things the banks did that caused the entire economy to implode vs lose some money, but if you wanna know what happens when banks try to make money off exclusively people with shit credit look no further than the sub prime mortgage crisis of 2008.
People that have good credit pay their bills on time, so the bank is more willing to loan them money which in turn generates interest.
They’ll make money off Credit Cards in the short term, and on your mortgage in the long term.
>If you have bad spending habits you may go over and will have to pay the banks more money, so why aren’t they more interested in those with bad credit?
Because in the worst case scenario, the person with bad credit goes bankrupt and the bank doesn’t get the full amount back that is owed – bankruptcy court can result in a significantly reduced amount owed or a longer-term repayment plan, or repossessed property that then have to be sold (costing time and money). Either way, it was a bad bet for the bank.
Banks and lenders as a rule like to have lots of small, safe bets. A person with great credit may only be paying small amounts of interest, but the bank can be much more confident that it won’t blow up in their face. They’ll take the smaller, safer payout, rather than the bigger, riskier ones.
One thing that you may not be aware of is that merchants have to pay a transaction fee to accept credit cards. Typically, the fee is 3.5%.
This means that, when more people have good credit and use their cards wisely and responsibly, more people are buying goods on their credit card and giving the card issuer that sweet 3.5% fee.
They have to balance the benefits of the bad credit person incurring additional fees against the risk that the person doesn’t pay bills and/or declares bankruptcy, which causes a large loss for the bank.
Targeting exclusively bad credit people is leaving money on the table from people with good credit. People with good credit are still going to have checking/savings accounts, occasionally incur fees, etc. It doesn’t make sense to give up on this market just to pursue the riskier market.
If you have a bad credit score there is also a chance you wont pay the money back. They make money off the interest they charge on the money loaned. 🙂
Another aspect is the ability to cross-sell. For example, let’s say I use rewards points to get you, good credit person, to sign up for my credit card. Well, now I have your info so I can send you information on opening a checking account, auto-loans, mortgages, etc. And if use of the credit card has given you a good impression of my bank, maybe you’ll be more open to using me for other stuff than you were before.
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