Credit card companies are finding it easier to obtain the financing necessary to fund consumer credit cards.
Unbeknownst to most consumers, credit card companies do not own the money they lend to their customers. Instead, they borrow it on the open market through bond financing. In some cases, credit card companies even sell their lending portfolios. Investors purchase the packaged debt securities as investments on the open market, and credit card companies exit their debt portfolios, reducing their risk.
Banks haven’t sold a substantial amount of secured credit card debt in quite some time. The practice reached a record prior to the financial crisis, when every type of debt was packaged and sold to investors – most famously mortgage-backed securities.
Banks have raised a record amount of cash from investors. Banks have issued a whopping $21 billion in bonds, which are backed by their clients’ ability to repay. So far, customers have maintained excellent credit history and record low defaults. Much of the change in consumer defaults comes as a result of aggressive write-offs during the most recent recession – banks wrote off any account that was anywhere near going into default.
Investors have taken notice of credit quality, and now they’re ready to gobble up debt from the major credit card issuers. This could be a boon for credit card customers, who see lower credit card rates when the cost of borrowing becomes less expensive for credit card companies. Last week, we reported that credit card companies were already pressing the pedal on rewards benefits for customers.