The U.S. credit card market has almost $4 trillion in open credit lines, and consumers “only” use $1 trillion as they revolve debt. The remainder sits on cardholder accounts, waiting for customer use.
The COVID crisis certainly ignites credit demand as people lose jobs, and e-commerce becomes the way to buy as we all shelter at home. But, issuers must be wary and contain risk.
As a result, expect credit lines to tighten. It will not affect all customers. Instead, anticipate a focus on lower FICO Scores and newer account risk. It is a best industry business practice.
Seeking Alpha mentions some real-time examples
Discover Financial Services (DFS +0.8%) is tightening underwriting strategies for new accounts as well as credit line management; the company said in a filing late yesterday.
Synchrony Financial (SYF +3.0%), which handles credit card programs for J.C. Penney, Gap, and American Eagle Outfitters, said in its conference call on Tuesday that it’s using “internal and credit bureau triggers to dynamically reevaluate the customers’ creditworthiness.”
Now, if you are a 750 FICO Scored account, and are with a major issuer, you will not be likely to receive a credit line downgrade unless your purchasing or paying habits change. If, all of a sudden, the credit card account goes from a 10% line utilization to 40%, be sure that internal controls will flag the account and requalify the credit line. Similarly, if the account went from paying correctly every month to requiring a credit payment deferment, credit policy algorithms at most banks will reconsider your available credit. The lower the credit score, the more likely this will occur.
There is plenty of comment in the media about how issuers are “about to reduce credit card lines.” Some of it will happen naturally as algorithms do their job. Expect to see credit policies tighten, as both Discover and Synchrony announced, but that is the best industry practice. The reason that other issuers have not made the announcement is that they are in the process of doing their quarterly filings. Expect to see more about that in the coming weeks.
Credit card lending is all about accepting consumer risk, and credit card issuers have varying tolerances. There are, however, themes that transcend high-risk lenders such as Capital One and Discover, all the way to the rich and famous handled by the American Express Black card.
Credit will open up in a while, but for now, you will find more conservative lending, and tighter credit management, as credit card issuers surf through the COVID-19 storm.
This is not a call to run up the credit card balance while you can. Prudent usage and self-discipline are the fundamental in having a credit card. Credit card issuers are compassionate about the need for credit and will often work with their cardholders. Remember, the crisis will be over. Sooner or later, people will be back to work, and they will be dining and traveling again. Bigger things need to happen first, such as states cleaning up their unemployment claim backlogs, and small business survival. For now, consumers should use their card wisely, protect their credit, and know that credit card issuers are in the business of lending, but they must be cautious.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.
