Research and Statistics

Banks tighten credit card loan standards, Fed says


Federal Reserve survey of senior loan officers finds declining appetite for risk meant higher barriers for credit card applicants in the third quarter.

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Banks tighten card lending standards

Banks tightened their standards for handing out credit cards in the third quarter, as they cut their appetite for risk amid fears that defaults will become more common, according to the Federal Reserve’s senior loan officer survey, released Nov. 6.

While real estate lending eased, banks reported they “tightened their standards and terms on credit card and auto loans,” the survey said.

The quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices asked 72 U.S. banks about changes in their lending standards. A separate section polled 23 U.S. branches of foreign banks.

Of 52 banks that responded to questions about consumer credit cards, nine said they had tightened standards, while four said they eased standards somewhat during the third quarter. The rest said they were about unchanged.

Signs of banks growing conservative about consumer credit

That marks a chillier reception for card applicants than in the second quarter, when eight banks said they tightened while six eased their standards.

“I think there’s growing awareness that maybe consumers are adding a little debt, and there might be some risk there,” said Robert Dye, chief economist at Comerica Bank. He added that the movement is relatively small.

The U.S. economic recovery has completed its eighth year, since growth began to rebound in mid-2009. That’s a longer-than-average period of economic growth without a downturn, economists say. Consumers’ revolving debt is near pre-recession peak levels, although consumers’ debt ratio is healthier than before the recession.

“Due to the length of the business cycle and some of the risk factors out there, banks are starting to get a little more conservative,” Dye said.

Higher credit score standards

In credit cards, tightening standards in the third quarter affected credit scores most strongly, the Fed report indicated. Seven banks said they had raised their credit score standards while three eased them.

Banks were also less flexible about granting card loans that didn’t meet their credit score standards, with six tightening their grip and only one saying it was more lenient. Most said they held steady in the third quarter.

“I think there’s growing awareness that maybe consumers are adding a little debt, and there might be some risk there.”

Changes in other credit card lending standards were less pronounced:

  • For credit limits, five banks tightened somewhat while four eased.
  • For interest rate spreads over the bank’s cost of funds, three tightened somewhat while one eased.
  • For minimum payments, one bank tightened somewhat and none eased.

Banks cited their reduced appetite for risk as the biggest reason for tightening their grip on cards for prime borrowers. Five called it “very important” and six “somewhat important,” compared to five who said it wasn’t important.

All eyes on tax reform

Rising expectations of a rise in missed payments was also an important factor in tightening cards for prime borrowers. Six banks said loan quality was “very important” and three “somewhat important,” compared to eight saying it wasn’t important.

Banks were about split about their concerns of economic uncertainty. Three called it “very important” and five said it was “somewhat important,” while eight said the economic outlook was not important.

Dye called proposals for middle-class tax cuts the wild card for the economy in the longer run. If the result succeeds in putting more disposable income into consumers’ pockets, it could extend the run of the economic recovery through 2018 and beyond, he said.

“A lot depends on tax reform at this point,” Dye said.

See related: Credit cards are now most common type of debt, Fed finds, Fed: Card balances jumped by $5.7 billion in August

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