Banks raise lim­its on credit cards

The looser lend­ing stan­dards en­able sub­prime cus­tomers to take on more debt.

Los Angeles Times - - BUSINESS - By E. Scott Reckard and Dean Stark­man

The na­tion’s ma­jor banks are more read­ily rais­ing bor­row­ing lim­its for credit card cus­tomers — in­clud­ing those with blem­ished credit his­to­ries — and are fac­ing higher risks as a re­sult.

With prof­its pinched by tighter reg­u­la­tion and low in­ter­est rates, banks are eas­ing lend­ing stan­dards at a time when loan losses have plunged, la­bor mar­kets are sta­bi­liz­ing and con­sumers are spend­ing more, in­dus­try an­a­lysts said.

Con­sumer ad­vo­cates, how­ever, worry that banks’ pur­suit of prof­its could re­sult in stick­ing strug­gling con­sumers with more debt than they can han­dle.

Credit card firms ap­proved 61% of the re­quests from card­hold­ers for higher bor­row­ing lim­its in an Oc­to­ber sur­vey by the Fed­eral Re­serve Bank of New York. But that ap­proval rate shot up to 76% in Fe­bru­ary’s na­tional sur­vey.

“Credit card is­suers are feel­ing a lot bet­ter about the econ­omy and their po­si­tion,” said Bill Hardekopf,

chief ex­ec­u­tive of LowCards.com, a credit card com­par­i­son web­site. “They want to gen­er­ate some new busi­ness.”

Curtis Arnold, founder of CardRat­ings.com, said it’s part of a pat­tern of banks re­lax­ing credit stan­dards af­ter years of tight re­stric­tions im­posed by reg­u­la­tors af­ter the fi­nan­cial cri­sis.

“Slowly, is­suers have got­ten more and more ag­gres­sive, not just with credit-line in­creases, but with lower rates, lower fees,” of­fer­ing longer pe­ri­ods with zero per­cent rates and the like, he said.

In some cases, banks are uni­lat­er­ally rais­ing credit lim­its on cer­tain cus­tomers with­out them even hav­ing to ap­ply, Arnold said.

The big­gest in­crease in ap­provals of higher lim­its was for a mid­dle tier of card­hold­ers with credit scores of 681 to 759. Th­ese cus­tomers, con­sid­ered prime-qual­ity bor­row­ers, were granted in­creases about 90% of the time, com­pared with 70% in Oc­to­ber.

So-called sub­prime cus­tomers, those with credit scores of 680 or less, suc­ceeded nearly half the time in Fe­bru­ary in get­ting in­creased bor­row­ing lim­its. In the Oc­to­ber sur­vey, their re­quests were granted only about a third of the time.

Typ­i­cally, sub­prime card­hold­ers face much higher in­ter­est rates and fees, which gen­er­ate higher prof­its for lenders. A sep­a­rate sur­vey last week by a bankers’ trade group showed that sub­prime bor­row­ers al­ready are open­ing more ac­counts and tak­ing on more debt.

“Credit cards are very use­ful for many peo­ple,” said Lau­ren Saun­ders, man­ag­ing at­tor­ney at the Na­tional Con­sumer Law Cen­ter. “But it’s way too easy to get in over your head, and we do worry about ex­tend­ing too much credit to peo­ple who should be try­ing to live within a bud­get in­stead of tak­ing on more debt.”

Al­ready trou­bled by the surge in sub­prime auto loans, Saun­ders ar­gued that banks should ex­tend credit only to card­hold­ers who can re­pay their debt quickly and not get trapped into mak­ing min­i­mum pay­ments for years. She noted that some sub­prime credit cards have hefty an­nual fees as well as sky-high in­ter­est rates.

Arnold said the hike in credit lim­its can be a ben­e­fit to con­sumers with fair to poor credit scores af­ter years in which only prime cus­tomers were of­fered credit-line in­creases.

With in­ter­est rates poised to rise, he said, now is a good time for con­sumers to con­sider seek­ing ex­tra credit — as­sum­ing the pur­pose is to im­prove their credit rat­ing or have ac­cess to credit for emer­gen­cies, not merely to in­crease spend­ing.

Christine Pratt, a se­nior an­a­lyst for Bos­ton con­sult­ing firm Aite Group, said she wasn’t too wor­ried that the New York Fed’s find­ings re­flected a danger­ous level of risk, partly be­cause over­all de­mand for credit re­mains rel­a­tively light by his­toric stan­dards.

What’s more, she said, the change in­volves in­creas­ing ex­ist­ing credit lines, as op­posed to new ac­counts, mean­ing that the banks are familiar with the bor­row­ers.

“You al­ready know what they’re do­ing,” Pratt said. “You know what they look like. It’s not like you’re go­ing out and grab­bing new ones.”

Still, looser lend­ing stan­dards prob­a­bly would in­crease the num­ber of missed credit card pay­ments at some time in the fu­ture, an­a­lysts at Stan­dard & Poor’s In­vestor Ser­vice said.

They also noted, though, that there is room for delin­quency rates to rise with­out caus­ing se­ri­ous harm to lenders or in­vestors in bonds backed by credit card pay­ments. That’s be­cause the in­ci­dence of trou­bled credit card ac­counts has fallen so low as a re­sult of tight lend­ing stan­dards im­posed af­ter the fi­nan­cial cri­sis and the Great Re­ces­sion.

A Fed­eral Re­serve quar­terly sur­vey of credit card delin­quen­cies, which in­cludes ac­counts charged off as un­col­lectable, topped out at 6.8% in the sec­ond quar­ter of 2009. The sur­vey fell be­low 3% three years later for the first time in its his­tory and has con­tin­ued to decline.

In the fi­nal three months last year, only about 2.2% of credit card ac­counts were in ar­rears or charged off, ac­cord­ing to the Fed sur­vey.

The Of­fice of the Comptroller of the Cur­rency, which reg­u­lates na­tional banks, has been mon­i­tor­ing the in­creas­ing risks that banks have been tak­ing on.

Re­laxed stan­dards in cer­tain other loan cat­e­gories be­gan rais­ing risk con­cerns as long ago as the sec­ond half of 2013 as banks vied for new busi­ness amid tepid eco­nomic growth and low lend­ing rates that cut their profit mar­gins, the reg­u­la­tor has said.

In a re­port last June, the agency termed lend­ing for cor­po­rate takeovers, car loans through auto deal­ers and com­mer­cial fi­nance as prob­lem­atic.

More re­cently, a Fed­eral Re­serve sur­vey of se­nior bank loan of­fi­cers in Jan­uary showed some large banks have eased lend­ing stan­dards for jumbo home loans and mort­gages el­i­gi­ble for pur­chase by home fi­nance gi­ants Fan­nie Mae and Fred­die Mac.

Fan­nie and Fred­die re­cently agreed to back home loans made with down pay­ments as low as 3%.

The New York Fed re­port di­vided credit card users into three cat­e­gories: sub­prime, prime and su­per­prime, those with credit scores of 760 and above.

About 24% of the sub­prime group had re­quested higher bor­row­ing lim­its in the last year, the Fe­bru­ary sur­vey showed, com­pared with about 14% of the mid­dle group and 6% of the top tier.

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