Credit Cards Are Back, But Will More Borrowing Follow?

Did you happen to notice far fewer credit card offers coming in the mail last year? You may also have noticed that those offers have sped up again this year. Dealing with painful credit defaults and aggressive new regulation, banks slowed their credit card offerings. But now that their credit losses have slowed and they've figured out how to deal with the new rules of the game, they're eager to push out new credit cards again. Yet will consumers be as interested in these offers as they were before the recession?

The New York Times' Eric Dash explains the return of credit card offers:

The rise is striking because it includes offers to riskier borrowers who were shunned as recently as six months ago. But this time, in contrast to the boom years, when banks "preapproved" seemingly everyone, lenders are choosing their prospects more carefully and setting stricter terms to guard against another wave of losses.

For consumers, the resurgence of card offers, however cautious, provides an opportunity to repair damaged credit and regain the convenience of paying with plastic. But there is a catch: the new cards have higher interest rates and annual fees.

This is actually pretty good news. When the new credit card regulation was first announced, some analysts feared that it would result in riskier borrowers being cut out of the market entirely. They worried banks would have trouble making non-prime credit card accounts profitable, with less flexibility to revise terms at a moment's notice. Instead of excluding these borrowers from the market, however, the companies will just make their borrowing more expensive.

These consumers are much better off having the option of credit, even if it's more expensive. This at least gives them a chance to build a stronger credit profile and eventually qualify for better rates. It also allows them to have a credit card to rely on in times of emergency. The hope, of course, is that these consumers will borrow responsibly and won't get stuck paying even higher fees and interest rates than before.

Banks need to continue to expand their base because they want to keep their credit card profits high. Yet this strategy assumes that consumers will bite. Credit card balances have been declining for 26 months straight, according to data from the Federal Reserve. While this decrease is likely part of the reasons credit card companies feel the need to be more aggressive with their expansion, if Americans are really weaning themselves off credit, then the profit from these new cards could be limited as well.

And that's ultimately good, too. While banks might be unhappy about the rise of the fiscally responsible consumer, the broader economy should embrace the paradigm shift. As Americans deleverage, they will have to pay less money in interest and fees, and will have more to spend, save, and invest. This should also result in better economic stability and long-term growth, as consumers are better able to keep up with their bills.