Research and Statistics

Consumers warily embracing credit cards again, Fed reports show


Like two old friends trying to rebuild a fractured relationship, banks and credit card users appear to be taking tentative steps toward reconciling, according to a pair of new Federal Reserve reports

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Like two old friends trying to rebuild a fractured relationship, banks and credit card users are tentatively reconciling, according to a pair of Federal Reserve reports released Monday.

The number of new credit card accounts grew in the second quarter of 2011, according to a new Federal Reserve report, though credit card ownership is still far below its pre-recession peak. To see an expanded version of the graph, showing the rapid rise and fall of credit card ownership, click on the image.

Number of credit card accounts up slightly, Fed says

During the second quarter of 2011, more consumers opened card accounts than closed them, and they had bigger credit limits to charge with, too, says the Federal Reserve Bank of New York’s Quarterly Report on Household Debt and Credit. The number of credit card accounts jumped by 10 million, to 389 million, between April 1 and June 30. In addition, aggregate credit limits went up by $60 billion.

The Fed’s quarterly senior loan officer survey, also released Monday, showed banks made it a bit easier for borrowers to get new credit in the second quarter. The survey also showed a bump in consumer demand for credit.

Taken together, the reports suggest consumers may be embracing credit again, and banks are becoming more willing to lend. If the trend continues, that’s a sea change from recent years, during which credit card issuers and cardholders shunned each other. As the recession sank in, issuers tightened their fists on existing cardholders’ lines of credit and denied new credit to all but the least-risky applicants. Consumers, meanwhile, rapidly paid down credit card debt.

Previous Fed data had hinted at this borrower-lender thaw. Mondays’ surveys indicate both sides’ renewed interest in each other has grown, albeit slowly.

“It’s a combination of banks easing their standards and consumer willingness to use their cards again after being reticent to take on any consumer loans,” says Gil Luria, senior vice president in equity research with Wedbush Securities.

N.Y. Fed report shows consumer demand
The latest New York Fed report shows a modestly greater consumer appetite for borrowing. That jibes with yet another Fed report, on consumer credit. Released in early August 2011, that report showed credit card balances rose by more than $5 billion in June after also increasing in May. Those were the first back-to-back gains in credit card balances since 2008. Since the economic downturn began, consumers had been furiously doing what economists call “deleveraging” — which the rest of us call paying off debts.

Significantly, borrowers have slowed their efforts to pay off various types of debts.

“Outstanding consumer debt remained essentially flat, down just $50 billion, in what was basically a repeat of the previous quarter. This is more evidence that the pace of consumer deleveraging that began in late 2008 has slowed,” Andrew Haughwout, vice president and New York Fed economist said in a press release accompanying the report. “During the next few quarters, we will gain a better understanding of whether this is a permanent or temporary break in the decline of total outstanding consumer debt.”

To collect its data, the New York Fed sampled Equifax credit reports to create a nationally representative sample of U.S. consumers. According to the New York Fed, its resulting database includes approximately 40 million individuals in each quarter.

The New York Fed reported that in the second quarter:

  • Credit limits rose by $60 billion (2.1 percent) from the prior quarter, for the second consecutive increase.
  • Consumer interest in getting credit rose. The number of credit account inquiries — which combines requests for new accounts and higher credit lines on existing accounts — again rose. They’re 7.5 percent above low point in credit demand, set in the first quarter of 2010.
  • The number of open credit card accounts rose by 10 million to 389 million. However, the number of open credit card accounts on June 30 was down 22 percent from its peak during the second quarter of 2008.

Loan officers survey: Growing supply, demand
The Fed’s senior loan officers survey also showed increased demand for credit cards, and said bankers are responding by tapping the credit faucet handle to trickle, not opening floodgates.

Unlike the New York Fed’s survey, which sifted data from millions of consumers, the central bank’s senior loan officers survey poses questions to 77 key individuals — bankers from 55 domestic banks and 22 U.S. branches and agencies of foreign banks. Despite the difference in survey techniques, the results were similar.

The loan officers reported the same wary rapprochement: 5 percent said they experienced increased demand for credit card loans in the second quarter, compared with about 77 percent who characterized demand for plastic as about the same as the previous quarter.

Analysts say that demographic changes in the U.S. population could partially explain the increased demand. The so-called Generation Y group of young adults is maturing, with some in that age bracket settling down, getting married and buying homes. As a result, some older members of Gen Y are “hitting a life stage that is requiring a greater use of credit,” says Ron Shevlin, senior analyst with research and advisory firm Aite Group.

The chart below shows the modest changes in lending standards for credit cards in the second quarter of 2011, compared to the severe tightening of lending that occurred in 2008, when the financial turmoil was at peaking.
ActionQ2 2011Q2 2008
For new applications
Loosening overall lending standards9.3%0%
Tightening overall lending standards0%66.6%
For new applications and existing accounts
Lowering credit limits11.1%47%
Raising minimum payments2.8%10%
Raising credit score requirements2.8%57%
Refusing to lend to those who don’t meet all lending standards2.8%50%
Source: Federal Reserve Senior Loan Officers Survey

Meanwhile, as banks loosen their lending standards, some consumers are snapping up newly available plastic. There “may also be pent-up demand for credit since we’ve seen such a low supply over the past two years,” Shevlin says.

Tough standards remain
Though card issuers and cardholders are warming to each other, all isn’t forgiven. Most banks say credit card lending standards remain tighter than they were in 2005. The Fed’s survey showed that around 11 percent of banks reported tightening credit limits on new or existing cardholders, while around 8 percent eased those limits. Also, twice as many banks reported raising interest rates on new or existing cardholders as lowered them.

“There is still more room to ease before they get to that middle road,” Wedbush’s Luria says.

That means credit card lending isn’t anywhere near the easy levels of pre-recession days. “This still reflects a fairly negative perspective. It’s not good for consumer lending,” says Aite’s Shevlin.

Competition loosens credit
Still, standards are easing, if only tentatively. Shevlin points out that when the Fed asked banks why they increased lending in the commercial and industrial space, 60 percent cited more aggressive competition as a “very important” reason for the loosening of standards. “Somebody else eased their standards, so they’re jumping on board,” he says. Although the Fed didn’t also ask for explanations about loosening standards when it came to credit card lending, Shevlin believes a similar motive is at work. “The reason these banks were easing their credit limits is they are responding to competitive pressures, not responding to an improving economy,” he says.

“It’s not so much a reflection of an improving economy as testing the waters of what will work in a continuing negative economy,” Shevlin says.

Will this resumed flirtation between card issuers and consumers last? Maybe.

“After one quarter of this, it’s just too early to say where this is a positive trend or not,” Shevlin says.

See related: Consumer credit card balances surge in June, Fed says credit cards easier to get, but does anyone want one?, Credit card limits jump for 1st time since 2008

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