Fed: Cards slightly easier to get, but consumers remain cautious

By Kelly Dilworth

If you have less than stellar credit, you have a better chance at getting a new credit card with favorable terms than you did last spring, according to research released Oct. 31 by the Federal Reserve.

The number of banks saying they made it somewhat easier for consumers to get credit rose in the third quarter of 2012. However, if you're like many consumers these days, you may not want the temptation.

According to the Federal Reserve's latest survey of senior loan officers, overall demand for new credit card loans rose somewhat last quarter. The spike in demand was modest, though, reflecting in part consumers' ongoing reluctance to sign up for more credit until they've shed the debt they've got.

"Consumers are very cautious right now," says Don Dutkowsky, a professor of economics in the Maxwell School of Citizenship and Public Affairs at Syracuse University. "The economy has a ways to go to get to a full recovery," he says and that's causing consumers to be extra careful about the financial risks they undertake.

The Fed's survey summarizes responses from 91 senior loan officer -- 68 representing U.S. banks and 23 from American branches and agencies of foreign banks. Overall, the latest report continues the recent trend showing a continuing, slow thaw of a credit card lending industry that nearly froze up during the recession.

None of the banks surveyed by the Fed said they received a substantial spike in credit card applications -- and some smaller banks said that the demand for new credit weakened in the third quarter of the year.   

More banks did say that they made it a little bit easier to get approved for new credit. Five of the country's largest banks and one small bank reported easing their standards somewhat in the third quarter of the year. However, the vast majority of banks left their terms unchanged, according to the survey, and didn't make any alterations to their standards for approving new applicants.    

Experts say that banks are likely to remain cautious about the cardholders they approve for some time and are unlikely to open their doors too wide to customers with less than stellar credit anytime soon. "There's kind of a sense that the Great Recession for many banks was kind of like being in a major car accident," says Dutkowsky. Banks wrote off an extraordinary amount of charged-off debt that they deemed uncollectible in recent years, losing money as a result, and have also had to contend with a slowing economy and tougher federal regulations, he says. That's made it hard for them to take bigger risks as the economy slowly recovers.

Now, "There's kind of a sense that, 'OK, the crisis is gone. The fever is broken,'" says Dutkowsky. "It's a better environment." But "it's certainly not back to where it needs to be." 

Banks are also waiting until consumers' finances become less risky and the banks' profitability on new loans increases, says Jim Johannes, director of the Puelicher Center for Banking Education at the University of Wisconsin.

"They are in a precarious position," he says. Banks would love to increase the amount of credit they lend to new cardholders since the credit card business can be very profitable, says Johannes. "But I'm not going to get into a product that people aren't going to repay me on [and] that I have no collateral on," he says.  

Johannes likens the tentative relationship that's developed between banks and new cardholders to dating. Both banks and consumers are looking for love, but are scarred by bad experiences. As a result, he says, they're both extremely wary of putting themselves in a position to repeat a painful history.

Inside the survey
Every quarter, the Federal Reserve polls loan officers across the country and asks them for a brief snapshot of what lending was like at their banks in the past three months.

Some of the highlights of this quarter's report include:

• None of the banks said they increased the standards for new credit card applications. However, a small number -- 4.3 percent -- said they hiked the interest rates on new or existing accounts. An equal number said they lowered cardholders' APRs.
• Four major banks said they made it slightly easier to secure a bigger credit limit. None of the banks said they made it harder.
• One large bank reported substantially lowering the minimum amount cardholders must pay each month. However, most banks left minimum payment amounts alone. 
• Another large bank also reported lowering the minimum require credit score for a new credit card. But 97.8 percent of banks said minimum thresholds for new applicants are about the same as they were last quarter. 
• Eight banks, including six of the country's largest banks, said demand for credit cards was somewhat stronger in the third quarter of 2012. Four banks said demand was a bit weaker, while most banks said that consumer's appetite for new credit cards has remained mostly the same.  

Looking forward, experts say we'll likely see more of the same until the economy substantially improves. "The economy is slowly improving, but it's got a ways to go," says Dutkowsky. "There's kind of a sense of waiting and seeing. Things are a little bit better, with time passing," he says. "But also there's a sense of not knowing what the future's going to be ... There's kind of a cautious optimism that things are going to get better, but very cautious."   

Published: October 31, 2012

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