Banks raising credit card borrowing limits for subprime customers
The nation’s major banks are more readily raising borrowing limits for credit card customers — including those with blemished credit histories — and are facing higher risks as a result.
With profits pinched by tighter regulation and low interest rates, banks are easing lending standards at a time when loan losses have plunged, labor markets are stabilizing and consumers are spending more, industry analysts said.
Consumer advocates, however, worry that banks’ pursuit of profits could result in sticking struggling consumers with more debt than they can handle.
Credit card firms approved 61% of the requests from cardholders for higher borrowing limits in an October survey by the Federal Reserve Bank of New York. But that approval rate shot up to 76% in February’s national survey.
“Credit card issuers are feeling a lot better about the economy and their position,” said Bill Hardekopf, chief executive of LowCards.com, a credit card comparison website. “They want to generate some new business.”
Curtis Arnold, founder of CardRatings.com, said it’s part of a pattern of banks relaxing credit standards after years of tight restrictions imposed by regulators after the financial crisis.
“Slowly, issuers have gotten more and more aggressive, not just with credit-line increases, but with lower rates, lower fees,” offering longer periods with zero percent rates and the like, he said.
In some cases, banks are unilaterally raising credit limits on certain customers without them even having to apply, Arnold said.
The biggest increase in approvals of higher limits was for a middle tier of cardholders with credit scores of 681 to 759. These customers, considered prime-quality borrowers, were granted increases about 90% of the time, compared with 70% in October.
So-called subprime customers, those with credit scores of 680 or less, succeeded nearly half the time in February in getting increased borrowing limits. In the October survey, their requests were granted only about a third of the time.
Typically, subprime cardholders face much higher interest rates and fees, which generate higher profits for lenders. A separate survey last week by a bankers’ trade group showed that subprime borrowers already are opening more accounts and taking on more debt.
“Credit cards are very useful for many people,” said Lauren Saunders, managing attorney at the National Consumer Law Center. “But it’s way too easy to get in over your head, and we do worry about extending too much credit to people who should be trying to live within a budget instead of taking on more debt.”
Already troubled by the surge in subprime auto loans, Saunders argued that banks should extend credit only to cardholders who can repay their debt quickly and not get trapped into making minimum payments for years. She pointed out that some subprime credit cards have enormous annual fees as well as sky-high interest rates.
Arnold said the hike in credit limits can be a benefit to consumers with fair to poor credit scores after years in which only prime customers were offered credit-line increases.
With interest rates poised to rise, he said, now is a good time for consumers to consider seeking extra credit — assuming the purpose is to improve their credit rating or have access to credit for emergencies, not merely to increase spending.
Christine Pratt, a senior analyst for Boston consulting firm Aite Group, said she wasn’t too worried that the New York Fed’s findings reflected a dangerous level of risk, partly because overall demand for credit remains relatively light by historic standards.
What’s more, she said, the change involves increasing existing credit lines, as opposed to new accounts, meaning that the banks are familiar with the borrowers.
“You already know what they’re doing,” Pratt said. “You know what they look like. It’s not like you’re going out and grabbing new ones.”
Still, looser lending standards probably would increase the number of missed credit card payments at some time in the future, analysts at Standard & Poor’s Investor Service said.
They also noted, though, that there is room for delinquency rates to rise without causing serious harm to lenders or investors in bonds backed by credit card payments. That’s because the incidence of troubled credit card accounts has fallen so low as a result of tight lending standards imposed after the financial crisis and the Great Recession.
A Federal Reserve quarterly survey of credit card delinquencies, which includes accounts charged off as uncollectable, topped out at 6.8% in the second quarter of 2009. The survey dropped below 3% three years later for the first time in its history and has continued to decline.
In the final three months last year, only about 2.2% of credit card accounts were in arrears or charged off, according to the Fed survey, which covered 1,200 consumers.
The Office of the Comptroller of the Currency, which regulates national banks, has been monitoring the increasing risks that banks have been taking on.
Relaxed standards in certain other loan categories began raising risk concerns as long ago as the second half of 2013 as banks vied for new business amid tepid economic growth and low lending rates that cut their profit margins, the regulator has said.
In a report last June, the agency termed lending for corporate takeovers, car loans through auto dealers and commercial finance as problematic.
More recently, a Federal Reserve survey of senior bank loan officers in January showed some large banks have eased lending standards for jumbo home loans and mortgages eligible for purchase by home finance giants Fannie Mae and Freddie Mac.
Fannie and Freddie recently agreed to back home loans made with down payments as low as 3%.
The New York Fed report divided credit card users into three categories: subprime, prime and super-prime, those with credit scores of 760 and above.
About 24% of the subprime group had requested higher borrowing limits in the last year, the February survey showed, compared with about 14% of the middle group and 6% of the top tier.
Separately, a study released last week by the American Bankers Assn. showed that subprime cardholders were taking on more debt, by percentage, than other categories as of the third quarter last year, the latest data available.
Their monthly credit card purchases rose 5.2% from the second quarter to an average of $182 billion a month.
Purchases by prime cardholders rose 2.6% to an average of $373 billion a month, and purchases by those in the super-prime category increased 1.2%, to an average of $519 billion. All three levels were at their highest since the Great Recession, the bankers’ trade group said.
In addition, it said, the subprime category saw a 21% increase in new accounts, with 17 million opened in the quarter compared with 14 million in the year-earlier period. New prime accounts also rose 21% and new super-prime accounts edged up 4%.
Reckard reported from Los Angeles and Starkman from New York.
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