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Americans want more credit, but banks remain leery, Fed says

Report says a few banks eased lending standards, but most left them alone

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More Americans searched for credit in late 2011, according to the Federal Reserve, but most banks didn't make it any easier on them to get it -- whether they wanted a new card or just a bigger credit limit.

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 fourth quarter of 2011 and in the second quarter of 2008, when credit tightening was at its peak. The chart also shows the percentage of banks which said they took certain specific actions regarding new and existing credit card accounts.
Action Q4 2011 Q2 2008
For new applications
Loosening overall lending standards 14% 0%
Tightening overall lending standards 2.3% 66.6%
For new applications and existing accounts
Lowering credit limits  5.4% 47%
Raising minimum payments
2.7% 10%
Raising credit score requirements
0.0% 57%
Refusing to lend to those who don't meet all lending standards 0.0% 50%

According to the Federal Reserve's latest survey of senior loan officers, a small number of banks are making it easier for more customers to get new credit cards. However, most banks are leaving their lending standards alone and some are even tightening their offers for new and existing customers.

"They're being very selective about who they offer credit to," says Dennis Moroney, research director in the bank cards division with advisory services firm TowerGroup.

Every quarter, the Federal Reserve polls loan officers across the country and asks them for a three-month snapshot of what lending was like at their bank. According to the Fed's latest report, released Monday, 15.5 percent of lenders reported seeing a moderate uptick in demand for new cards. Many of those applicants -- particularly those with lower credit scores -- likely had a hard time getting approved for the card they wanted. 

According to the report, only 14 percent of loan officers reported that their banks made it easier for consumers with less than stellar credit to qualify for a new credit card. None of the 37 officers surveyed, however, said they eased lending standards substantially and 2.3 percent of loan officers said they tightened their standards somewhat.

Meanwhile, current credit card holders saw their credit limits get trimmed, with 5.4 percent of loan officers reporting that they cut credit limits for new and existing customers. A slightly larger number -- 8.1 percent of loan officers -- said they made it somewhat easier to get a higher credit line. But the vast majority -- 86 percent of loan officers -- said they kept their credit limit standards the same.

Banks still leery of lending too freely
Lenders' reluctance to extend a hefty amount of credit to cardholders with less than perfect credit histories is nothing new. After the economy nosedived in 2008, banks across the country made substantial changes to their credit card lending practices. Some of those changes included cutting customers' credit limits, jacking interest rates and raising the bar for new applicants.

It wasn't until 2010 that banks began to loosen their grip on lending. However, the majority of banks across the country are still slow to make big changes to how much credit they're willing to extend.

They're being very selective about who they offer credit to.

-- Dennis Moroney,
research director, TowerGroup

Dianne Velez of New Jersey is a good example of what's happening on the ground. She says her credit limit was cut substantially after she racked up a significant amount of debt on her cards. "I had an $8,000 credit limit and at the end of it, I had a credit limit of about $600 bucks." Velez says that as she continued to pay down her card balance, her credit limit kept getting cut. She responded by canceling all her cards except for one and didn't apply for a new card until the end of 2011. Her new card has a significantly lower interest rate and better terms. But her APR is still at 21 percent, which is significantly higher than the national average, according to the CreditCards.com Weekly Rate Report.

A mixed bag for cardholders
Many cardholders with imperfect scores, like Velez, appear to be getting slightly better credit card offers than before and are finding it easier to get approved. But their terms are still tight.           

For example:

  • 5.4 percent of banks reported lowering the minimum credit score needed to get a new card. And 2.7 percent said they were more lenient toward customers who didn't quite meet their credit score threshold. However, more than 90 percent of lenders said they left their credit score requirements alone.
  • Most banks also left interest rates alone in the last three months of 2011 as well. Just 5.4 percent of lenders said they raised interest rates, while only 2.7 percent lowered them.
  • One lender from a small bank reported significantly lowering the minimum amount cardholders have to pay on their credit card bills and a lender from a large bank said it raised the minimum amount due. However, most lenders kept their payment amounts alone.

Experts say that banks will continue to remain cautious until they have more certainty about the economy and about legislative changes going forward. Banks' bottom lines were trimmed significantly after new regulations from the Credit CARD Act of 2009 and the Dodd-Frank Wall Street Reform and Consumer Protection Act went into effect and experts say banks are still trying to adapt to the changes.

"Banks are still jittery," says Moroney. "There's still a lot of legislation that hasn't been enacted." 

And as long as banks are uncertain about how much risk they can afford to take on, they're unlikely to extend a substantial amount of credit to cardholders with riskier credit scores, says D. Anthony Plath, a professor of economics at the University of North Carolina at Charlotte. "The tone of the regulators hasn't changed at all," says Plath. "The regulators are still being really careful in scrutinizing" the types of credit cards offered to consumers. So banks are "still being really careful."

Optimistic about 2012
That said, banks are more optimistic than they were before. Occasionally, the Federal Reserve asks lenders special, one-time-only questions about lending and this time they asked lenders what they expect credit quality to look like in 2012. More than one in five (21.6 percent) said they expect credit card loan quality to improve -- meaning they expect fewer cardholders will fail to pay their bills. Only 5.4 expect loan quality to deteriorate.

That perspective falls in line with what experts are seeing. "When I'm talking to people, they're very optimistic. They're lending more." says Moroney.

Once the dust settles on the economy and on regulatory changes, consumers could see better offers in the future. "The issuers are being more aggressive in who they're sending offers to and they're getting to that riskier score band that has a higher response rate but also a little higher risk," adds Moroney. 

However, adds Plath, "As we realize the economy is really not that strong, I think it's going to be a slow careful market for credit cards."

Published: January 30, 2012


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