Unfortunately, for many consumers getting access to credit is not getting easier, it’s getting tougher. Getting access to credit cards, in particular, has gotten much tougher as credit card lending standards have been getting very tight. The most recent Loan Officer survey from the Federal Reserve revealed that nearly 60% of all credit card issuers that tightened their lending standards in the fourth quarter of 2008 tightened their lending criteria even further in the first quarter of 2009.
But consumers looking for credit are having a tough time getting access no matter where they look; whether it’s a credit card, home equity loan or a new mortgage, consumers are struggling mightily to get access to much needed credit in the flagging economy. In fact, according to the Fed’s Loan Officer survey, borrowing on credit cards was even harder than securing other types of consumer loans, which have traditionally been far more stringent getting approval for than credit cards have ever been. As a result, many consumers are outraged. Lenders and card issuers have tightened lending criteria and eliminated billions in credit lines for consumers at exactly the time when consumers need them the most.
The astronomical amount of federal bailout money that banks have received has left many consumers disillusioned. Even after receiving billions upon billions from taxpayer money, banks and card issuers don’t seem willing to extend credit to even their most creditworthy customers, including Frank Bargnani of Santa Monica, CA. Bargnani was furious about receiving a cancellation notice from his card issuer after being a loyal customer for 16 years. “They cancelled the card because of a late payment on my credit report that happened 6 years ago. It doesn’t make any sense. Other than that, my credit record is spotless.”
The economic crisis is forcing the credit card industry to make dramatic changes in how they conduct business. Many consumer advocates, who have argued long and hard for reforms in the credit card industry, have cheered the most recent legislation passed in Congress. The new legislation will prohibit industry practices such as double-cycle billing and retroactive interest rate hikes on past balances. Card issuers have responded to both the threat of this new legislation and the economic crisis by sharply reducing their credit exposure. The card issuers simply argue that if they can’t properly “price” the risk associated with lending in this market, they simply won’t lend.
But other changes being made by card issuers are also being widely felt. Card issuers have responded not only by toughening lending standards but also by eliminating long standing promotional features of credit cards as well. Card issuers have reduced and all but eliminated features such as 0% introductory APR’s on balance transfers or purchases as well as features such as “instant approval” online for credit cards. Rewards programs have been curtailed or shuttered entirely and cardholders have seen the value of their airline miles earned and the rebate amounts on their cash back rewards cards dwindling sharply.
With all of the changes going on industry wide, credit scores have taken on even more importance for consumers trying to get access to credit and the best rates available. Almost half of all lenders who responded to the survey said they had modestly raised their minimum credit score “threshold” requirements, but the reality is that increases for minimum credit score requirements have spiked dramatically. Not too long ago, the gold standard for excellent credit was a FICO score of 720, but not any longer. Many banks and card issuers have raised their minimum threshold for “excellent” credit to 750 and above on consumer loans and credit cards. These days, a FICO score of 720-749 is now typically only considered a “good” credit score. So many consumers who easily qualified for the best interest rates and the highest limits on credit cards in the past few years cannot even meet the minimum requirements just to get approval for a card right now.
Not surprisingly, consumers with poor credit are finding it nearly impossible to get credit. While consumer advocates believe that cutting credit limits and restricting credit in this way is sensible to some degree given the state of the economy, others believe that card issuers need to be far more sensitive to consumers on a case by case basis. Instead of making sweeping changes across the board, banks and card issuers should take into consideration individual borrower information, but they lack the capacity to do so because of the sheer number of customer they have to deal with.
Card issuers are gravely concerned with rising defaults and loan losses from credit card lending. According to a recent report by Equifax, payments on bank-issued credit cards at least 60 days late have risen sharply year over year. Credit card lenders are expecting charge-offs from defaults and delinquencies to rise in 2009 and well into 2010. Banks have reacted swiftly to the rising unemployment numbers and increasing credit card defaults by sharply curtailing their lending. Until economic conditions stabilize and employment improves, credit card defaults will keep rising and card issuers will continue being very stingy with credit for the foreseeable future. Most economic forecasters don’t anticipate a turnaround in rising unemployment until well into 2010 and with unemployment serving as a primary driver of credit card defaults and delinquencies, the lending outlook for new credit remains decidedly bleak.
In a recent article by CreditCards.com, Keith Davis, an analyst with investment firm Farr, Miller and Washington, expects banks and card issuers to continue guarding against additional credit losses with extremely cautious lending practices. “This is going to contribute to a very conservative approach by banks.”
Steve Sildon is Managing Editor for CreditCardAssist.com. Steve writes frequently about the benefits and pitfalls of using credit cards and provides tips and advice on various credit card-related topics, such as how to select the best cash back and airline miles rewards programs and how to choose among 0% APR and balance transfer credit cards.