Card Issuers Have Resisted Slashing Credit Limits During Pandemic

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In a shift from the previous U.S. economic crisis, credit card issuers last year mostly avoided clamping down on their existing customers’ borrowing limits, according to a new report from the Consumer Financial Protection Bureau.

The report, one of the most extensive analyses of credit card trends during the pandemic, found a significant tightening of credit availability as lenders lessened their appetite for new business. But the stricter credit criteria mostly appeared to affect potential new customers rather than existing ones, the CFPB’s biennial report to Congress on credit cards indicated.

Card account closures and credit limit decreases stayed stable last year even as unemployment soared, which analysts say is yet another indication that the government’s unprecedented support for consumers drastically shifted the typical patterns in an economic downturn.

“We did have a crisis,” said Brian Riley, director of credit advisory services at Mercator Advisory Group, “but because of the support that was given, it really kept the market for consumer credit steady.”

He added that card issuers behaved “a lot more rationally” in comparison with the 2007-2009 crisis. The relative stability in the card market last year has raised expectations about a potential rebound in card balances in 2021, though an industry-wide recovery has yet to materialize.

Last year, some media reports pointed to a broad-based slashing of card limits, but the CFPB found that just 0.9% of general purpose credit cards saw a decrease in their available credit limits during the second quarter of 2020. That was far below the peak of 3.7% at the height of the Great Recession, the report noted.

“There is little evidence to support an unprecedented, industry-wide slashing of existing credit limits as widely reported during the COVID-19 national emergency,” the CFPB said in its report, adding that one explanation for card issuers’ reluctance to cut credit lines may be that they to “avoid angering their customers.”

Card issuers were on “pretty high alert” when the pandemic first hit, but they ended up responding with what was more of a pause in new business than a protracted and broad-based pullback in credit availability, said Erik Budde, the founder of the credit card advice website GigaPoints.

“The attitude was almost like, ‘This is just going to be a blip,’” Budde said, noting that financial markets rebounded quickly.

Customers with below-prime credit scores were more likely than other consumers to experience credit limit decreases, the CFPB noted. Those decreases were “surprising and often acutely felt,” and the CFPB last year saw a 65% increase in complaints related to that issue, the report said.

Line decreases may have long-term effects on borrower credit scores, according to the CFPB, which noted that a severe line decrease could lead to a nine-point score reduction.

The CFPB said that it intends to do additional study on the effects of credit line decreases on credit utilization and credit scores, particularly for consumers who have non-prime scores.

Most measures of credit availability on cards fell last year after consistent growth since the Great Recession, the report found. The pullback was likely due to a combination of healthier consumer balance sheets leading to reduced credit demand and a pull-back by issuers in marketing, according to the report.

Consumers in 2020 submitted more than 140 million credit card applications, down from 172 million in 2019. Mail solicitations for cards plunged last year, hitting a new low of 61.6 million in July 2020, down from 311 million per month in 2019.

Credit card debt levels also fell sharply, as many borrowers paid off or lowered their balances with savings they accumulated from staying at home more often and government relief payments. Though card balances started ticking back up later in 2020, overall credit card debt ended the year at $825 billion, below the $926 billion peak in 2019.

Lenders have been relatively upbeat this year that consumers will start to tack onto their card balances again, though the spread of the delta variant this summer risks cutting into that momentum. A fresh update on consumer borrowing is due to come in mid-October as banks start reporting their third quarter earnings results.

The CFPB report also noted the rise of buy now/pay later products from companies like Affirm, Klarna and Afterpay, which offer short-term installment loans on merchant websites. Their ascendance has prompted credit card heavyweights to add similar products within traditional cards.

The growing popularity of the BNPL model has also raised questions about what approach the CFPB may take in regulating the upstart lenders. The agency alluded to that topic, saying that buy now/pay later products have “continued to attract regulatory attention (as well as calls for further regulatory attention) domestically and internationally.”

Key differences between buy now/pay later loans and credit cards “may present risks to consumers,” the agency said. BNPL lenders are not required to consider customers’ ability to repay loans, may not offer the same disclosures and may not have the same billing error resolution procedures, the report said.

But the consumer bureau 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 providers in this space to take steps to make sure users of these products are adequately informed of the risks of such products,” the report stated.