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Banks loosen credit card lending standards, Fed report says

Report has good news for new applicants, but not for current cardholders

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For the second straight quarter, banks made it a little bit easier to get a new credit card, the Federal Reserve said Monday. However, data also showed it remains a tough time to be an existing cardholder.

And things likely won't get a lot better for new applicants or existing cardholders for at least another year -- if at all.

BY THE NUMBERS: RECENT
CHANGES TO LENDING STANDARDS
The chart below shows the percentages of banks that tightened specific lending standards for new credit card applications in the third quarter of 2010 and in the second quarter of 2008, when credit tightening was at its peak. The chart also shows the percentage of banks who said they took certain specific actions regarding new and existing credit card accounts.
Action Q3 2010 Q2 2008
For new applications
Loosening overall lending standards 12.5% 0%
Tightening overall lending standards 2.5% 66.6%
For new applications and existing accounts
Lowering credit limits  7.9% 47%
Raising minimum payments
5.3% 10%
Raising credit score requirements
2.6% 57%
Refusing to lend to those who don't meet all lending standards 2.7% 50%

In its latest survey of banks' senior loan officers, released Monday, the Fed indicated that bankers were more willing to approve new credit card applicants. During the July to September period, more than 12 percent of lenders -- all of which were large banks -- reported easing their credit card approval standards, while one small bank said its standards had tightened. That's an important shift in approvals, since banks had avoided extending new credit for several years during and after the economic recession.

"The industry has changed over the last two years," says Andrew Davidson, senior vice president of Mintel Comperemedia, which tracks direct marketing offers. "For the most part, offers for new credit cards are loaded with rewards, features and benefits and are arguably better than ever despite the CARD Act." 

As for those "better-than-ever" features, some experts are less emphatic. "As the economy gets better (albeit slightly), we are seeing credit standards loosen once again," though only back to historical norms, Anuj Shahani, a director in the financial services group at direct-mail marketing research firm Synovate, says in an e-mail. He adds that Synovate's Mail Monitor shows banks increased their credit card offer mailings to households by 25 percent in the third quarter from the second quarter of this year.

But for some existing credit cardholders, access to credit became more difficult and costly. Those tighter bank lending standards leave some borrowers facing higher interest rates and lower credit limits. Some are still tightening: In Monday's report, one large bank acknowledged requiring higher minimum credit scores for card approvals in the third quarter.

When might those banks begin lending more freely? In a special, one-time-only part of the survey, the Fed asked those banks with tighter lending standards that question. Most said that those standards wouldn't ease before 2012. And when it comes to loans for subprime borrowers -- those with less-than-stellar credit -- most banks said standards would stay tight indefinitely.

To assemble the survey, every three months, the Fed asks banking executives about changes in the supply and demand for loans to businesses and households over the previous quarter. The latest survey included responses from 57 domestic banks and 22 U.S. branches and agencies of foreign banks. The responses about credit cards showed that while it has become easier to get new plastic, it remains a tough time to be an existing cardholder.

Numbers show credit access still tight
The Fed's survey showed that 12.5 percent of banks reported easing their standards for card application approvals, while 85 percent said their standards were basically unchanged. 

When asked about changes to terms and conditions for new or existing cardholders over the past three months:

  • 7.9 percent of banks reduced consumer credit card limits. None reported increases.
  • 12.2 percent of banks increased business credit card limits, while 9.8 percent decreased them.
  • 7.9 percent hiked consumer credit card interest rates, while 5.3 percent lowered them.
  • 2.6 percent raised the minimum credit scores required for a consumer credit card, while 5.3 percent lowered the minimum score requirement. 
There's a bit of disparity between large and small banks when it comes to extending lines of credit to business cardholders. About 27 percent of small banks said they had increased business credit lines during the survey period, while just 4 percent of large banks said the same. That means business cardholders looking for additional credit may have a better chance of securing those line increases at small banks.

Consumers not using cards
Against that backdrop of still-tough terms and conditions, cardholders haven't exactly been charging like it's 2007. 

The Fed continues to blame tight credit, among other factors. "Household spending is increasing gradually, but remains constrained by high unemployment, modest income growth, lower housing wealth and tight credit," the Federal Open Market Committee said in its monetary policy announcement on Nov. 3

The combination of tight credit, cardholders' increased repayment efforts and bank write-offs have caused an ongoing drop in credit card balances. The Fed's G.19 consumer credit report released Nov. 5 showed revolving debt levels slumped to $813.9 billion in September, sharply down from a peak of $973.6 billion in August 2008. Among U.S. households that shoulder credit card debt -- which government data shows total about 54 million -- roughly $2,957 in credit card debt has been erased.

Shoppers need to hit the stores to spur economic growth and create jobs, Shahani says. "Given the U.S. consumer is responsible for 70 percent of the GDP, the consumer plays the biggest role in our economy," he says. "As consumers are seeing the modest recovery, they are ramping up spending once again."

In the year 2012 ...
Cardholders with high credit scores should be the first group to see bank lending standards return to normal. In the special section of survey questions, about 38 percent of banks said that lending to prime borrowers will return to normal in 2012 or before, while 29.4 percent of banks said they expect lending standards to those customers will remain tighter than average "for the foreseeable future." 

For borrowers with more average credit, meanwhile, the wait could be somewhat longer. Among banks responding to the same questions about non-prime cardholders, 13.6 percent said lending standards will return to normal after 2012, while 54.5 percent said lending standards will remain tight for the foreseeable future.  

Experts say banks have already begun differentiating between the two groups. "A line has been drawn in the sand between the creditworthy and the non-creditworthy and, as a result, products are more polarized than in the past," says Mintel's Davidson. "These days you are unlikely to receive an offer in the mail with no annual fee if you have a poor credit score. Two years ago, Washington Mutual and Capital One sent millions of these offers to subprime consumers," Davidson says.

See related: Consumer credit card balances plunge more than $8 billion in September, A comprehensive guide to the Credit CARD Act of 2009, Consumers continue to shed debt, Consumers gain new right to opt out of rate increases

Published: November 8, 2010


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