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Credit-Card Spending Limits In the Crosshairs As Issuers Grow Cautious (#GotBitcoin?)

Capital One and Discover are pulling back on some consumers as economy ‘almost feels too good to be true’. Credit-Card Spending Limits In the Crosshairs As Issuers Grow Cautious

Two of the biggest credit-card issuers are tightening lending standards, an unusual move in a strong economy that may signal longer-term concerns about consumers’ financial health.

Capital One Financial Corp. and Discover Financial Services said last week they have become more cautious in how they’re handling credit limits. The two lenders said they don’t currently see signs of deterioration in consumers’ ability to pay their debts but do question how much longer the economic recovery will last.

“In so many ways, one can’t help but be struck by…just how good the economy [at] this point is,” Capital One Chief Executive Richard Fairbank said on the company’s earnings call. “And in some ways, it almost feels too good to be true.”

Credit-card limits have long served as an indicator of lenders’ outlook. During the last financial downturn, card issuers slashed credit limits to avoid incurring new losses. Around 2015, many lenders began increasing limits as they courted more balances and interest income.

Capital One and Discover are gauges of many Americans’ ability to handle debt.

Discover generally doesn’t market to affluent customers, and Capital One has a large number of customers with less-than-pristine credit scores, making both companies a window into a part of the economy that is often the first to show cracks. Some 33% of Capital One’s domestic card balances, for example, are owed by subprime borrowers, according to the bank.

The biggest banks have in recent years targeted affluent customers with above-average credit. Banks like JPMorgan Chase & Co. and Citigroup Inc. reported earnings earlier this month that pointed to consumers’ continued strength.

Capital One and Discover, on the other hand, signaled they are paying more attention to how consumers use their cards’ spending limits. Mr. Fairbank said on the earnings call that the company had “further dialed back” during the past year on spending limits for newly issued credit cards and on raising existing cardholders’ spending limits.

Discover said it reduced the number of credit-card balance transfer offers to a group of consumers it considers to be higher risk. That was in part to avoid consumers who would likely transfer a balance to a Discover credit card that would max out their spending limits, CEO Roger Hochschild said in an interview. He said the move is a “nuanced example of tightening.”

Separately, Discover has shut down inactive credit cards totaling nearly $30 billion in spending limits over the past two years. The effort is in part aimed at lessening the chances that credit cards that have been abandoned in sock drawers or elsewhere will suddenly start being used by cardholders if they become desperate for credit.

Discover also said it expects losses to increase on personal loans, and it has cut back on originations there.

“It really is about reducing risk,” Mr. Hochschild said. “By traditional measures we’re pretty late into an economic cycle.”

The renewed caution comes in part because consumers have been taking on record levels of debt. The total dollar amount outstanding on credit cards, personal loans, student loans and auto loans in the U.S. has never been higher.

Rising interest rates also play a role.

The rates charged on credit cards, for example, generally rise when the Federal Reserve raises rates, leading to larger required payments for consumers. The Fed has raised short-term rates three times this year.

One sign of a pullback is playing out in the subprime portion of the credit-card market. Subprime borrowers who were approved for new credit cards in the first quarter received an average spending limit of $949, down 10% from a year earlier, according to the latest data from credit-reporting firm TransUnion. That was the sixth consecutive quarterly drop since a postrecession peak of $1,155 in 2016.

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