‘Credit crunch.’ ‘Card issuers tightening their belts.’ ‘Credit limits cut.’ ‘Interest rates jacked.’ You’ve seen the headlines, but just how bad is it? Can you still get a credit card?
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“Credit crunch.” “Card issuers tightening their belts.” “Credit limits cut.” “Interest rates jacked.” You’ve seen the headlines, but just how bad is it? Can you still get a credit card?
Contrary to what you might hear, while millions of Americans are hurting, many more millions more are still living their lives, buying houses, cars and getting new credit cards, just as they always have. As Howard Dvorkin, author of “Credit Hell: How to Dig Out of Debt” and founder of the nonprofit Consolidated Credit Counseling Services, says, “Clearly, there are problems right now, but is it impossible to get a credit card? No.”
Who is the ideal credit card customer?
Many people can still get a credit card, perhaps not with the terms and conditions they were used to, but there is a lot of daylight between the best credit cards and the worst. Who are the people who can still get a good credit card with a low interest rate or a rewards card?
“I would just say that we continue to provide credit to qualified borrowers,” says Bank of America spokeswoman Betty Riess. “In general, we look at ability, stability and willingness to repay.”
Go to the National Foundation for Credit Counseling, an accrediting agency for nonprofit credit counselors, and they’ll say the best deals go to those with the best credit scores. However, the definition of a good credit score keeps changing.
“All the pieces of the formula have changed, just due to what we’re experiencing, and so I think that’s why it’s left people feeling very uncertain,” says Kathy Virgallito, director of community and business development at Consumer Credit Counseling Service in Columbus, Ohio. “We’re hearing that you can get a good loan, whether it’s for a house or a credit card, if your score is 750 or 760, whereas a year, or a year and a half ago, it was 730, 720.”
That dovetails with what Sandra Shore, senior counselor at Novadebt, a nonprofit credit counseling service in New Jersey, says: “In the past, it was always 720 and 740 when you could expect a good credit card. But now, I’ve heard that some credit cards want as high as 760. But I’d say that if you’re at 740 or 760, there’s going to be no difficulty in getting a good credit card at this point.”
If you’re truly concerned about your credit cards and creditworthiness, “take charge,” says Virgallito. “You have to decide, ‘I’m going to become knowledgeable about my personal finances, I’m going to understand my credit score and look at my personal finance habits.’ And that puts consumers in the driver’s seat.”
“Standards are a little tougher,” says Dvorkin. “We’re in a time when people are scared, and banks don’t know if they’re coming or going.” What’s happened, says Dvorkin, is that the pendulum has swung “from lending to people who, five years earlier, they never would have, all for the sake of growth” to the opposite direction. “Now,” says Dvorkin, “if you have good credit, they’re still eyeing you, wondering if you’re going to default. Because even people with perfect credit can’t say that they aren’t going to lose their job.” According to a Federal Reserve survey of senior loan officers, more than half (60 percent) said they continued to tighten lending standards on credit cards and other consumer loans in the third quarter of 2008.
So what are the new standards? Lucy Duni, vice president of consumer education for TrueCredit.com, a website owned by credit bureau TransUnion says, “I would say that if you have a credit score of 700 or above, you can get a credit card with a good rate. Obviously, the higher the score, the better, but if you’re in the 700s, you should be in good shape.”
Under 700 won’t disqualify you from applying for and getting a credit card, but she says it could keep you from landing a competitive annual interest rate and terms. Duni has another suggestion: She says that credit card companies generally want to see that people are paying down their debts rather than maxing out their cards. Until recently, it was recommended that consumers use no more than 35 percent of their total credit limit, but in recent months, it has seemingly changed to where 30 percent is the new goal to aim for. Card issuers use this credit utilization ratio to help determine if you are a responsible credit card user and not maxing out all your available credit.
Statistically speaking: Charge-offs
The numbers involving late credit card payments to simply defaulting on credit payments are trending in a troubling direction, which has contributed to the smackdown. Consider the following:
- Wells Fargo, the country’s eighth-largest credit card issuer, saw its charge-offs — loans that will never be collected and will be sold off by the bank — increase to 7.2 percent during 2008 from 4.3 percent in 2007.
- Capital One, the fifth largest card issuer, reported that charge-offs increased from 6.54 percent in October 2008 to 6.98 percent in November 2008.
Despite the increase in charge-offs, overall net charge-offs were down slightly during the third quarter of 2008 (4.39 percent in Q2 to 4.18 percent in Q3), according a recent report from the American Bankers Association.
Not that anyone should celebrate. The fourth quarter numbers that have come in aren’t going down: During the waning months of 2008, the Discover Card charge-off rate rose to 5.48 percent from 3.85 percent from one year ago, for instance. As bad as things are, the rate of charge-offs hasn’t yet reached its historical high of 7.5 percent, which the country hit during the recessions of 1991 and 2001. The historical low is 3 percent, which was seen as recently as 2006.
Even though experts predict credit card charge-offs will peak at 9 percent or even 10 percent in 2009, Dvorkin remains optimistic. “I personally think that the worst might be over. It might get a little worse,” he hedges, “but by the time 2009 is done, I think it’ll be a decent year. It’s not going to be a great year — I don’t think that. But truthfully, I think it’ll be a year of digging out. I think the bomb already went off, and that by the end of the year, we should be on the way out of this.”
In the midst of this negative news, however, it’s easy to overlook that more than 94 percent of the approximately 173 million credit card consumers — who hold 292 million credit cards, according to the latest census information — are still paying their bills on time. And while credit bureau TransUnion reports that the average American has around $5,710 in credit card debt, the Federal Reserve says that 54 percent of U.S. households carry no credit card balance at all.
Faces behind the numbers
Elisabeth Schoepfer, 23, an office manager in Smithtown, N.Y., just got a new Visa card through Chase. “I was definitely surprised that I was approved, and the amount that I was approved for,” says Schoepfer, who added that while she normally makes her payments on time, in the past few months, she had been “slacking.” Schoepfer was late on some payments, maxed out a card “and even charged over the maximum amount.” She says she was able to move her old credit card debt to a balance transfer credit cards with 0 percent interest.
The Amecks are another example. “My husband and I are both 31,” says Angela Ameck, a resident of Ringgold, Ga. “We have two sons and own our house. My husband works at a major health care company as a financial underwriter, and I am a stay-at-home mom.” The Amecks recently signed up for seven credit cards between the two of them, including a Starwood Preferred American Express and a Bank of America NFL Visa, in order to take advantage of various rewards programs and cash back offers. She acknowledges that the credit card deals weren’t as good as they’ve been in the past, their credit limits weren’t as high and they weren’t able to combine credit limits on cards to make a balance transfer, but they were still able to get cards. However, they are good credit risks with credit scores over 700.
Keep your perspective
All the negative news out there has probably driven some people to cut up their credit cards, but even someone such as Dvorkin, who makes his living trying to get people out of debt, thinks that not having any is going too far. “You need a credit card in the year 2009,” he says. “You need one for travel, for emergencies. It would be crazy not to have one. You don’t need eight credit cards, and you don’t need private-label cards where you can only use them at one store. It’s not having the credit cards that are the bad part. It’s what you do with them while you have them.”
And if the rewards and offers are fewer, the credit card companies are still soliciting customers for credit cards. Even though credit card direct mail solicitations dropped substantially from 2007, issuers still mailed 5.4 billion card solicitations in 2008, according to data from Chicago-based direct marketing research firm Mintel Comperemedia. The drop-off in card offers was almost entirely to people whtih incomes below $50,000. Offers flowed at the same rate as before to those with high incomes.
The positive side to all this is that Americans collectively possess less credit card debt than in the past. In the Federal Reserve’s monthly G.19 report on consumer credit, the revolving credit category — made up almost exclusively of credit card debt — declined 7.8 percent in December 2008, which means that people are charging less.
Plus, many economists are predicting that the worst of the current recession will occur in the first quarter of 2009 and begin a slow rebound thereafter, writes Dale McFeatters of ScrippsNews in an editorial. “I think the crunch is loved by the media, and they make it much worse than it is,” says Beth Dunn, 37, a novelist in Mays Landing, N.J. Dunn applied for two credit cards in December 2008, and she was able to get an American Express card with 0 percent financing and another for her business from Capital One — a Visa with 3 percent interest.