Unlike the previous U.S. economic crisis, most credit card issuers last year avoided restricting borrowing limits for their existing customers, according to a new report from the Consumer Financial Protection Bureau.
The report, one of the most in-depth analyzes of credit card trends during the pandemic, found a significant tightening in credit availability as lenders decrease their appetites for new business. But the tighter credit criteria seemed to primarily affect potential new customers rather than existing customers, the CFPB’s biennial report to Congress on credit cards said.
Card account closings and credit limit cuts remained stable last year even as unemployment skyrocketed, which analysts say is another indication that unprecedented government support for consumers has radically altered the typical patterns of an economic downturn.
“We had a crisis,” said Brian Riley, director of credit counseling services at Mercator Advisory Group, “but with the support that has been provided it has really kept the consumer credit market stable.”
He added that card issuers have behaved “much more rationally” in relation to the 2007-2009 crisis. The relative stability of the card market last year has raised expectations of a potential rebound in card balances in 2021, although an industry-wide recovery has yet to materialize.
Last year some media reports reported a widespread reduction in card limits, but the CFPB found that only 0.9% of general purpose credit cards saw their available credit limits decrease in the second quarter. of 2020. This was well below the peak of 3.7% at the height of the Great Recession, the report notes.
“There is little evidence to support an unprecedented reduction in existing industry-wide credit limits, as was widely reported during the national COVID-19 emergency,” the CFPB said in its report, adding that one explanation for the reluctance of card issuers to reduce lines of credit may be that they “avoid angering their customers”.
Card issuers were on “fairly high alert” when the pandemic first hit, but ended up responding with what was more of a pause in new business than a prolonged and widespread withdrawal from credit availability. said Erik Budde, founder of credit card advice site GigaPoints.
“The attitude was almost like ‘This is going to be just a blip,’” Budde said, noting that financial markets rebounded quickly.
Customers with lower than premium credit scores were more likely than other consumers to have their credit limits lower, the CFPB noted. The declines were “surprising and often felt keenly,” and the CFPB recorded a 65% increase in complaints related to the issue last year, according to the report.
Line drops can have long-term effects on borrowers’ credit scores, according to the CFPB, which noted that a large drop in the line could result in a nine-point reduction in the rating.
The CFPB said it intends to conduct additional study on the effects of declining lines of credit on credit usage and credit scores, especially for consumers who have unprivileged ratings.
Most measures of credit availability on cards fell last year after steadily growing since the Great Recession, according to the report. The pullback was likely due to a combination of healthier consumer balance sheets leading to reduced demand for credit and a pullback from issuers in marketing, according to the report.
In 2020, consumers submitted more than 140 million credit card applications, up from 172 million in 2019. Mail solicitations for cards plunged last year, hitting a new low of 61.6 million in July 2020 , compared to 311 million per month in 2019.
Credit card debt levels have also fallen sharply, as many borrowers have paid off or reduced their balances thanks to savings they accumulated from staying home more often and government assistance payments. Although card balances began to rebound later in 2020, aggregate credit card debt ended the year at $ 825 billion, below the peak of $ 926 billion in 2019.
Lenders have been relatively bullish this year that consumers will start taking their card balances again, although the delta variant will spread this summer. risks cut in this momentum. A new update on consumer lending is expected to be released in mid-October, as banks begin reporting their third quarter results.
The CFPB report also noted the increase in buy now / pay later products from companies like Affirm, Klarna, and Afterpay, which offer short-term installment loans on merchant websites. Their ancestry has guest heavyweights of the credit card to add similar products within traditional cards.
The growing popularity of the BNPL model has also raised questions on the approach the CFPB can take to regulate entry-level lenders. The agency alluded to the matter, saying buy now / pay later products “have continued to attract regulatory attention (as well as calls for more regulatory attention) nationally and internationally.”
The main differences between buy now / pay later loans and credit cards “can pose risks to consumers,” the agency said. BNPL lenders are not required to consider clients’ ability to repay loans, may not offer the same information, and may not have the same procedures for resolving billing errors, according to the report.
But the Office of Consumer Affairs also wrote that buy now / pay later products “offer not only convenience, but a new way of financing for many consumers.”
“The Bureau encourages all suppliers in this space to take measures to ensure that users of these products are adequately informed of the risks of these products,” the report said.