R.K. Hammer Forecast for “Near Prime” Card Segment
(October 6, 2014) — Card industry advisor R.K. Hammer and their subsidiary Card Knowledge Factory® have been studying and reporting on the performance and characteristics of all segments of the card issuing business for over two decades. Prime, super prime, prepaid/secured, private label/retail credit, and subprime have all been widely described in the financial press over 740 times. One other category which has received far less scrutiny, though, is what is termed “Near Prime.”
“Everyone would love a portfolio of all Primes and Super Primes, but there are only so many of those to go around,” notes Bob Hammer, Founder and CEO at R.K. Hammer and Card Knowledge Factory®.
What really are Near Prime Accounts, and What Does it Mean for Card Applicants?
Near Prime new card account applicants live on the border of becoming prime, they are just not yet there. FICO scores in the range of 670 – 699 in our models are just below the threshold necessary to be considered prime by many, also with no more than one 30 DPD delinquency in the last year or any 60 DPD in the last three years; they are also deemed just above the quality of subprime accounts. This will of course vary by organization. APR’s are accordingly slightly higher for Near Prime compared to Prime, and approved lines of credit and cash available are somewhat lower, reflecting the higher risk associated with accounts less than Prime status. This can change positively over time, however, for those whose account performance improves as the accounts season, become more stable and credit worthy.
At initial card issuance, Prime card applicants can expect 13.5% APR’s; that rises to 16.5% for Near Prime, and 20%+ and more for subprime. Annual fees also vary between the varying quality segments.
Graduation Potential to Prime Status is Critical
Savvy issuers have been examining this lesser known category for their growth and “graduation” potential. Every next million accounts of quality is harder and harder to find, so it seems clear that to expand one’s marketing push to include these borderline applicants makes sense. They must be properly priced and managed, though. In addition, an important part of the account maintenance for Near Prime accounts is to have a well-defined “status graduation” program in place; an “educational marketing” strategy, as R.K. Hammer terms it. The more informed consumers are, the strategy goes, the better the portfolio risk profile will ultimately become. R.K. Hammer experience mirrors that supposition; post-recession, most issuers are addressing the marketplace again, looking outward.
Based upon usage and repayment behavior many issuers follow the progress of these accounts for potential to be graduated to Prime status, with higher resulting credit lines and lower resulting APR’s. Once their monthly FICO’s have crossed the threshold for Prime, however any given issuer may define that term internally, they will naturally begin to receive prime account offers from other issuers, too. Not to graduate these accounts then to the higher level of account status creates a negative self-fulfilling prophesy; they will simply and inevitably attrite to another issuer who gives them a better value proposition that they now deserve. “Move them up or move them out,” as the old adage goes.
New Card Applicant “Cut-Off” Scores & Applicant-Decisioning Necessarily Vary by Institution
It is important to note that there is no one generally accepted definition of Near Prime accounts, nor is there any common applicant cut-off score, below which the card application would be declined. The foregoing presents the experience and opinion of R.K. Hammer on the subject over 25 years. Most card lenders use varying version updates of FICO scores up to FICO 9, data reported to the three credit bureaus, and accompanied by application information scores and other available internal information used to assess card applicant risk.
What’s the best definition of Near Prime? Any given financial institution’s view of bureau report contents and how they specifically define acceptable and manageable levels of risk in their credit policy. “Your data supported by your definition” is the short answer. One card CEO we knew in the early years had one over-riding criterion (in additional to FICO’s etc.): any bank history of checking account overdrafts. How consumers handle cash on hand in checking accounts is a forerunner of how they will manage credit. Any bank history of overdrafts, and “If so, out you go; if none, in you come.”
The take away is this: we are all looking for new quality card accounts – however one defines quality – and we believe that the card segment which deserves a closer look is Near Prime. Properly priced and closely managed, these accounts have opportunities to satisfy consumers who otherwise might be declined, and then be given the chance to rise to Prime status if their usage and repayment performance is deemed satisfactory over time. Near Primes have been around ever since there were first cutoff applicant scores, just without the title that’s being talking about so much these days.
Some organizations graduate these accounts as soon as the FICO snapshot hits a preset threshold target, while others wait to see if that improved performance is proven reliable over several months as a trend not just a snapshot before offering the improved product and pricing, raising the card account to Prime status. Either way, it becomes a win/win for the consumer and the lender to spend management time better understanding and growing a file of Near Prime accounts, and upgrading when possible.
ABOUT R.K. HAMMER
R.K. Hammer is a premier provider of card advisory services to financial Institutions in the U.S and in 50 countries abroad. For over 25 years they have offered card portfolio valuation and sales, expert witness testimony for issuers in litigation, interim portfolio management for issuers in transition, and general card consulting on best practices in the card industry. R.K. Hammer opinions and research have been published over 740 times in virtually all the financial press, and the firm’s research and analysis division known as Card Knowledge Factory® has a suite of reports and benchmarking metrics available for card lenders and equity investors on how to capitalize on the Near Prime card segment and other marketing and profit strategies, updated annually.
More information may be viewed by going to: www.rkhammer.com and cardknowledgefactory.com