Creditnet News Story

New regulations may push consumers to short-term loans

Tuesday, February 23, 2010

By William Davis

Credit CARD Act could make lending to subprime borrowers less attractive.

Given new regulations that have taken effect, lenders may find it difficult to justify sending credit card offers to consumers who have subprime credit scores.

As a result, a recent report from Reuters notes that people at this level on the credit-score scale may find that they are further drawn to things like payday loans, which can charge high interest rates when taken at an annual level.

"If they're using cards to manage cash flow from paycheck to paycheck, who steps in to meet that need? That could be the payday lenders," Scott Valentin, analyst at FBR Capital Markets, told the news organization.

However, consumer advocates have noted that payday loans can end up putting people in a cycle of debt, as they continue to tap into the short-term loans to make up for their high interest rates.

Though the Credit Card Accountability, Responsibility and Disclosure Act may discourage lenders from making credit card offers to people with subprime scores, the new rules do come with stipulations regarding credit cards designed for these borrowers.

The new regulations try and guard consumers against excessive fees on credit cards designed for subprime borrowers, while also forcing lenders to consider a person's ability to pay before issuing an account.