Lenders eager to regain credit card business are issuing credit card offers to riskier borrowers with more frequency, but with lesser terms. In an effort to raise profits, many banks are classifying borrowers by other than just their Fair Isaac Corporation (FICO) score.

Riskier borrowers who still receive credit card offers are categorized as strategic defaulters or first-time defaulters. Lenders are hoping strategic defaulters will still be responsible consumers in spite of their low FICO scores since they made a conscious choice to default on their underwater mortgage.

Lenders are also extending an olive branch to first-time defaulters, assuming most of these people who fell behind on their mortgage during the recession are now recovering and will make payments on time.

On the other hand, there are still categories of consumers who will not be offered a credit card. They are classified as:

  • “sloppy payers” who are only current on a few bills each month;
  • “abusers” who refuse to make payments; or
  • “distressed borrowers” who just don’t have the means of paying.

first tuesday take: Looks like the decrease in profits has lenders finally wising up and looking beyond a consumer’s FICO score. Since most borrowers who actively chose to walk away from their mortgages still have a consistent income (a job), their ability to make credit card payments (including interest) is strong. [For more information regarding the FICO score, see the June 2010 first tuesday article, The FICO score delusion.]

Make no mistake; this effort to reintegrate strategic defaulters back into lending is built purely upon desperation. What is most important to lenders is not the best interest of the consumer — it is and always will be their portfolios. All the backlash against strategic defaulting underwater homeowners aside — the supposed “irresponsible borrower”— lenders are ever aware their livelihoods depend on lending to those who will pay them interest.

The goal of lending is to shear the lamb, but not to kill it.  Thus, once the economy gains back certain strength, expect the mortgage loan bar to be lowered even further — it will be business as usual.

Re: “Risky borrowers find credit again, at a price” from the New York Times