Banks expect credit to ease near pre-recession levels
Fed survey of senior loan officers finds strings loosening on cards
With the economy slowly recovering and unemployment gradually diminishing, American consumers are finding credit cards easier to obtain, credit limits are starting to rise, and some people are beginning to whip out their credit cards more often, according to a new federal report.
In fact, the overall growth rate of credit card loans soon could return to pre-recession levels, according to the Federal Reserve Board's latest quarterly survey of senior loan officers.
The report serves as additional evidence that the nation's economy -- and, in particular, the credit card industry -- are stabilizing after the serial upheavals of the Great Recession. At the same time, consumer advocates remain cautious, and a little worried.
"Spending is good for the economy, as it creates more revenue for companies, which, in turn, creates more jobs," said Christopher Viale, president and chief executive officer of the Cambridge Credit Counseling Corp. in Massachusetts and vice president of the Association of Independent Consumer Credit Counseling Agencies, which represents 32 nonprofit credit counseling companies.
"But, at the end of the day, if the economy is driven by consumers overspending beyond their means, shame on the system," Viale said. "Financial burdens are one of the most devastating things a family can go through. My counselors see and hear this at least 100 times every day of the week."
One key indicator of economic improvement and one worrisome sign for consumer counselors: A majority of the surveyed senior loan officers foresee a 6 percent annual growth rate in credit card lending by 2016. That is the same annual rate of growth experienced by the industry during the decade before the recession began in late 2007.
David Nice, associate economist at Mesirow Financial in Chicago, noted that 6 percent annual growth in credit card balances would represent a significant leap from recent annual levels of about 1.3 percent.
He said the loan officers' responses serve as a useful barometer of lender optimism, though some caution is advised.
"It's based on people's opinions, people's mood at the time," Nice said. "You can take it with a grain of salt, but it's good that it's moving up."
According to the report, which was issued this week and surveyed loan officers from 97 banks between April 1 and April 17:
- Many banks lowered standards for approving consumer credit card applications during the first three months of the year. About 11 percent of the respondents -- most of them representing large banks --- said they had "eased somewhat" their credit standards for approving credit cards for individuals or households. Only one bank reported tightening those standards, with the rest saying their standards remained essentially unchanged.
"On net, banks eased standards on consumer credit card and auto loans, and tightened standards on nontraditional closed-end mortgage loans," the Fed reported.
- More than 14 percent of the surveyed loan officers said their banks had modestly elevated credit limits on many credit card accounts during the first quarter of the year. None had an across-the-board policy of lowering limits.
- Six percent of the respondents said they had modestly lowered the minimum credit score required to qualify for a credit card. The vast majority of the others said their credit score requirements had not changed.
- Partly as a consequence, at about 14 percent of the reporting banks, demand for credit cards strengthened between Jan. 1 and March 31. Nearly 4 percent of the banks reported slightly weaker demand; most reported demand similar to that experienced at the end of 2013.
- As it turned out, however, 2013 was not a great year for the industry. Credit card applications increased, the respondents said, but at relatively anemic rates. Loan amounts also increased, but also at unimpressive rates, by the industry's standards and expectations.
An increase in the use of debit cards and a slightly growing preference to pay off credit card debt without rolling it over to another month were two factors, loan officers said, but new consumer protections also were frequently mentioned.
"The survey respondents most widely cited the 2009 Credit Card Accountability Responsibility and Disclosure Act (Credit CARD Act) and consumers' preference for lower debt levels as important factors that constrained credit card loan growth in 2013," the Federal Reserve reported.
Among the act's provisions cited as constraining loan growth: A prohibition on raising interest rates on existing balances. Restrictions on credit card fees. A requirement that card payments first be applied to debts with the highest interest rates. A requirement that borrowers under the age of 21 have adult co-signers. Newly required disclosures to consumers.
- Looking ahead, respondents from more than half of the banks expect higher growth in consumer credit card loans for the rest of this year -- especially when it comes to balances carried by their most creditworthy customers, known within the industry as "prime" and "super-prime" customers. Fifty-two percent of the banks expect somewhat higher growth than during 2013 and 6.5 percent expect substantially higher growth.
- Nearly one in four banks also expects less-creditworthy customers to account for somewhat higher growth in credit card activity during the rest of the year. Only 6.5 percent expect lower growth from those cardholders.
That's the sort of thing that starts caution lights flashing for consumer advocates.
"Giving consumers access to spending is always good for the economy," Viale said, "but the real question is -- have consumers learned a lesson from the last 'free-for-all' they were given? Some may have, but I would say that the majority have not."Our culture hasn't changed, even though we hear a lot about the push for financial education and living a more financially sustainable lifestyle," he said. "I'm afraid that this has not been deployed in any meaningful way to actually affect consumer behavior."
CreditCards.com Senior Reporter Fred O. Williams contributed to this report.
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