Research and Statistics

Banks continue to tighten credit card lending standards


When it comes to tightening lending, the Fed survey of senior loan officers shows credit card issuers have gone from death grip to light squeeze.

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Getting and keeping a credit card got tougher and more costly between July and September.

Banks continue to make it harder for consumers to get credit cards, with about 16 percent of issuers reporting tightened credit card lending standards. The rate of tightening fell sharply in the third quarter of 2009, but lending standards remain far tighter than before the recession.

Quarterly loan officer survey from the Federal Reserve

Those are among the conclusions of the Fed’s quarterly survey of senior loan officers released on Monday. The survey asked banking executives about changes to their institutions’ lending standards for everything from mortgage loans to credit cards. When it comes to plastic, the report showed that issuers are still raising interest rates, reducing credit limits and making other moves, but not quite at the rate they were earlier in 2009.

Between 30 percent and 40 percent of banks reduced credit limits, raised interest rates or both on new or existing customers in the third quarter of 2009. The news was better for those applying for cards. Only about 16 percent of banks said they had tightened standards for approving credit card applications for individuals and households, down from 35 percent in the prior survey and marking the lowest percentage since April 2008.

Still, banks aren’t making it any easier on current or potential customers. Consumer advocates say the recent treatment of cardholders could end up hurting lenders. “In the long run, it’s always a bad idea to mistreat your customers,” says Gail Hillebrand, an attorney and consumer advocate with Consumers Union, the nonprofit publisher of Consumer Reports magazine. “Clearly, there are major players in the card industry who don’t agree with that.”

Dealing with the recession and more
Bankers will tell you that a perfect storm of troubles — including higher unemployment, more onerous regulation and consumers’ increasing aversion to debt — forced them to find other ways to generate profits. Many of those moves were evident in the survey, which included responses from 57 domestic banks and 23 U.S. branches and agencies of foreign banks.

When asked about changes to terms and conditions for new or existing cardholders over the past three months, about one-third of banks said they had:

  • Reduced credit card limits.
  • Hiked APRs.
  • Raised the minimum credit scores required for a credit card.

The Federal Reserve made a special point to ask banks about the impact of the sweeping pro-consumer reforms in the Credit CARD Act, most of which takes effect in February 2010. Here’s some of what they said:

  • Roughly half of banks said the legislation has already or will lead to reduced credit limits for customers with good credit scores, so-called prime customers. About 60 percent say they will do the same for those with poor — or subprime — credit.
  • About 40 percent say it has led to or will lead to hiked annual fees for those with good credit scores. Forty-five percent of banks said the same about those with poor credit.
  • About 30 percent expected to increase the use of variable rates, which allow them to more easily raise rates in the future without interference from the reform law.
  • About 47 percent said they intend to or have already raised minimum credit score requirements for prime customers getting a credit card. That goes to 53 percent for subprime customers.
  • Nearly 75 percent of banks have already or will increase APRs on those with poor credit, compared to 54 percent for those with prime credit.
  • Of the banks that make credit card loans, 75 percent did not expect to be compliant with the provisions of the legislation until February 2010, when most of the provisions will go into effect. The rest were either already compliant or expected to be compliant by the end of 2009.
  • The lone bright spot? A few banks said they expected to lengthen grace periods and decrease penalty fees.

Credit lines being cut
Other research falls in line with the Fed’s latest survey. Anuj Shahani, director of competitive tracking services for the research firm Synovate, says his company’s latest data indicate that it’s no longer just cardholders without balances who are having their lines of credit reduced. “Initially, all the issuers were targeting transactors. But now, we believe issuers are targeting revolvers in a big way,” he says, referring to cardholders who carry a balance from month to month. He says the average household had a third-quarter line of credit of $26,657, down from $28,005 in the second quarter.

The Fed asked credit card issuers what they have done or will do because of the Credit CARD Act, the reform law whose chief purpose was to rein in uncontrolled rate hikes. The result: rate hikes, and other tougher terms and conditions, for both prime (good credit) and subprime customers.

Quarterly loan officer survey from the Federal Reserve

When a bank decides to reduce a line of credit — or close an account altogether — the result can be a vicious circle for cardholders who carry a balance, Shahani says. That’s because if one issuer cuts a line of credit, it changes a key measure of creditworthiness — the credit utilization ratio. Once a bank cuts a credit limit, causing the ratio to fall, other banks may step in and cut their cards’ credit limits, too.

In hopes of rehabilitating their weakened credit scores, some consumers have responded by paying down their credit balances — only to see their banks repeatedly cut the cards’ limits in a process known as “balance chasing.”

“They cut it multiple times as you pay down the balance,” Hillebrand says.

Credit line reductions are more of a concern for consumers on the borderline between different credit grades of credit quality, she says. “The issue is more for people on the borderline between A+ and A. You do pay a different amount for A and A- credit.”

APRs on the rise
Card issuers recently changed tactics, she says, shifting from lowering consumers’ credit limits to raising their interest rates. Over the past two months, “all over the country, consumers have been getting a notice in the mail saying ‘We’re raising your rates on your existing balance.'”

Rate increases on existing balances are severely restricted by the new law.

The national weekly survey of credit card rates confirms the rate spike: Three months ago, the national average rate stood at 11.94 percent. By Nov. 5, the average had shot up to 12.64 percent.

Once the economy does recover, consumers may not look favorably on banks that punished them when times were tough, Hillebrand says. “I do think the industry’s marketing costs are going to go up because of the shameful way they are treating consumers now.

“People remember.”

See related: A comprehensive guide to the Credit CARD Act of 2009, Consumer debt falls $10 billion as cardholders trim balances, Card issuers: Sorry, new law says we can’t cut your rates, Consumers gain new right to opt out of rate increases

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