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 (#GotBitcoin)
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.
Credit Cards Companies Slash Spending Limits By At Least $99 Billion
Some people had complained as limits began dropping. Now the full scope is emerging.
The notices went out to one cardholder after another, sparking complaints. Big banks were trimming credit limits by hundreds or thousands of dollars as the Covid-19 pandemic spread. None were saying how far it would go.
The Answer: The 14 lenders that dominate U.S. credit cards slashed $99 billion from their customers’ spending limits in 2020, mostly affecting financially troubled households. It’s the equivalent of cutting $2,000 in financing to 50 million people — many of whom lean on cards for emergencies.
Capital One Financial Corp., known for its “What’s in your wallet?” slogan, led the way by paring $30 billion from limits by the end of 2020. Larger rivals Citigroup Inc. and JPMorgan Chase & Co. each saw their totals fall by $19 billion.
While the retreat set off flurries of frustrated posts on social media, its scope remained a mystery because numbers aren’t typically disclosed in corporate earnings reports, with annual figures appearing only recently in arcane filings with the Federal Reserve.
The cuts threaten to exacerbate the economic divide between U.S. households. Financially healthy Americans kept their credit and are now so flush with cash — stockpiling an estimated $1.7 trillion in excess savings since outbreaks began — that some analysts expect “revenge spending” to power record consumer purchases. That would stoke economic growth.
But millions of others will emerge from the pandemic financially weakened, and catching up may be all the harder with less access to credit. Cards can provide a crucial safety net for emergencies that can create more problems — helping someone fund a car repair, for example, to commute to work.
“Low-income people have trouble surviving without their credit cards,” said Scott Schuh, an associate professor at West Virginia University who previously served as director of the Federal Reserve Bank of Boston’s Consumer Payments Research Center. “They have to have them because no one else will give them credit or they may have to pay even higher interest rates elsewhere.”
Consultants who work with card issuers say lenders’ caution made sense given skyrocketing unemployment and widespread fears about the potential impact of Covid-19 lockdowns on commerce and the economy. Extending credit to someone sliding into insolvency can make it even harder for them to dig out.
“Most issuers looked at this and thought, ‘This is going to be a disaster. We better shut this down,’” said Ron Shevlin, who works with community and regional lenders as director of research at Cornerstone Advisors.
U.S. credit-card issuers have relatively little insight into who’s lost jobs or income since they opened accounts, unless they voluntarily inform their lender. That forces banks to make assumptions about who might fall on hard times, run up bills and default. To avoid that risk, some banks closed dormant accounts or lowered their customers’ limits to whatever level they regularly use.
By mid-2020, many banks told the Federal Reserve in a survey that their lending standards were about as high as they’d ever been in the past 15 years.
Credit bureau data show who was affected most by such caution. TransUnion estimates that borrowers with low credit scores — subprime and near prime — saw their limits reined in by a combined $110 billion. For subprime borrowers, the reduction amounted to 30% of their borrowing capacity.
Meanwhile, on the other end of the spectrum, credit-card issuers expanded lines for the safest borrowers, or those with super prime scores, by an estimated $81 billion.
Capital One said it periodically reviews and adjusts accounts, and it may close those that haven’t been used in a while. “Last year, all credit limits were kept significantly above the highest balance of the past year to ensure that customers could continue to use the card as they had been,” said spokesperson Sarah Craighill.
Citigroup said the main reason it saw total credit fall was a drop in applications for new cards, not credit-line decreases for existing customers. “Retail store closures and lockdowns had a more pronounced impact for Citi,” spokesperson Jennifer Bombardier said. That’s because a significant portion of the bank’s card business is based on partnerships with retailers and airlines.
“We regularly review customer accounts and adjust credit limits, both up and down, based on usage and behavior,” JPMorgan spokesperson Amy Bonitatibus said. “As the economy improves, we expect more customers will be eligible for increases to their credit limits.”
The 14 card giants offer roughly $4 trillion in credit, mostly to wealthy or financially stable households. Most of that is for U.S. customers, but some lenders, including Capital One and Citigroup, also lend internationally. Goldman Sachs Group Inc., which is building a card business, was the only firm that dramatically increased total limits — raising them 64%.
Banks usually set lower caps for households with blemished credit histories or low incomes, so reductions there tend to be felt more severely. Tightening or eliminating a credit line reduces the borrower’s available financing, which in turn hurts their credit score.
It isn’t so easy for people with spotty records to replace lost credit lines. Banks offered lower limits on new subprime cards last year, cutting the average amount to $688 in the third quarter, down from $1,015 during the same period in 2019, TransUnion figures show. That means it would take three cards to replace $2,000 in lost credit. Many new cards for subprime borrowers impose startup fees or require cash collateral.
The reduction in credit available to U.S. consumers contrasts with their surprising resiliency in the pandemic. Across the country, households tightened budgets and found relief in government programs that included thousands of dollars in stimulus payments to eligible families.
“Strikingly strong consumer credit has persisted throughout 2020,” Capital One Chief Executive Officer Richard Fairbank told analysts in January. “Consumers are behaving cautiously, spending less, saving more and paying down debt.”
Severely late payments on cards fell last year from 2.49% to 1.89%, according to Equifax. Writeoffs of bad debt fell too.
Cutting credit to those who need it most has implications for the much-needed rebound in commerce.
Lower limits after the 2008 financial crisis were responsible for about 25% of the drop in overall consumption by consumers, said Schuh, who’s written a paper on the topic.
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