Research and Statistics

Credit card lending standards keep tightening, Fed report says


It became tougher to get a credit card in early 2010, according to the latest data from the Federal Reserve, even as banks were more willing to offer other types of loans.

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It became tougher to get a credit card in early 2010, according to the latest data from the Federal Reserve, even as banks were more willing to offer other types of loans.

In the first quarter of 2010, banks continued to tighten credit, though not at the frantic pace seen in recent years. Only 9 percent more banks said they were tightening lending standards than said they were easing them. The graph below charts out the change in that percentage since 1996.

(NOTE: Percentages represent net percent of banks reporting tightened credit card lending standards. Positive numbers represent the percentage of banks that are tightening; negative numbers are the percentage loosening.)

Quarterly loan officer survey from the Federal Reserve

The Fed’s quarterly survey of senior loan officers released on Monday showed that banks tightened their lending standards on both consumer and small business credit cards in the first quarter. It’s the 11th straight quarter of tightening, dating back to 2007. But lenders made other types of loans more available, with nearly twice as many banks saying noncard loan standards eased as the number that tightened.

Credit card tightening can include hiking interest rates, slashing credit limits and requiring higher minimum credit scores on new or existing cardholders. These actions had become commonplace in recent years, as banks blamed the challenging economy and the Credit CARD Act‘s restrictions for their hesitancy to lend. And though fewer banks report tightening now than they did in the lowest depths of the recession — for example, 66 percent of banks said they had tightened lending standards during the second quarter of 2008 — it’s still not easy to get plastic.

Banks further limit lending
In the latest survey, about 15 percent of banks reported tightening their credit card lending standards in the first quarter, while only about 6 percent eased them. (In the previous quarter, just 6 percent of banks reported tightening and 3 percent easing.) The vast majority of banks — more than 78 percent — left their lending standards unchanged, down from 90 percent in the prior survey.

To gain insight into lending standards, the Fed surveys banking executives regarding changes in the supply of and demand for loans to businesses and households over the prior three months. The latest survey included responses from 56 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:

  • 29 percent of banks reduced credit card limits.
  • 27 percent raised interest rates.
  • 12 percent raised the minimum credit scores required for a credit card.

Faced with less access to credit, consumers appear to be digging into their savings accounts to fund purchases. March data from the Commerce Department showed that consumer spending increased twice as fast as income, while the savings rate declined.

Some analysts say that data suggests improved economic growth to come. In the first quarter, “U.S. consumer spending rose at the fastest rate in three years and contributed to a 3.2 percent growth in the GDP gives us confidence to believe in the U.S. consumer” says Anuj Shahani, director of competitive tracking services for Synovate, a direct-mail marketing research firm. “We probably got into this mess due to our lending standards (or a lack thereof), and so it’s not a bad thing that the issuers are observing some type of restraint and are being more selective,” Shahani says in an e-mail. “This certainly looks like a move in the right direction.”

Getting tougher for small businesses
The latest survey included special questions about small business credit cards for small firms. As with consumer plastic, the survey showed U.S. banks have tightened business card standards: 70 percent of U.S. banks say their standards and terms are “tighter than its longer-run average level.”

Other highlights of the small business survey included:

  • 41 percent of lenders reported increasing the minimum required credit score for getting a new small business account.
  • 35 percent decreased the extent to which loans are given to small businesses that don’t meet credit scoring thresholds.
  • 32 percent lowered credit limits offered to new small business accounts.

Noncard loan standards easing
The survey wasn’t just about credit cards, however, and the news was significantly better for noncard loans. Fourteen percent of banks said they were had eased their lending standards in the previous quarter, while only eight percent said their standards had tightened.

The chart below shows the percentages of banks that tightened specific lending standards in the first quarter of 2010 and in the second quarter of 2008, when credit tightening was at its peak. At that point, senior loan officers surveyed by the Fed said that 66 percent of banks at that point said that they had tightened lending standards in the previous three months. In the first quarter of 2010, only a net 9 percent reported tightening.
ActionQ1 2010Q2 2008
Lowering credit limits29%47%
Raising minimum payments3%10%
Raising credit score requirements12%57%
Refusing to lend to those who don’t meet all lending standards21%50%

See related: 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

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