The banking sector’s wobbles could reverberate in the fine print of credit-card offers — resulting in stingier deals.
At a time when banks were already tightening their credit-card lending standards, observers say the Silicon Valley Bank fallout might prompt card issuers to pull those standards even tighter as they navigate their own lending risks.
Tighter standards could translate to less attractive APR offers, shorter lines of credit and/or fewer offers for consumers to choose, the experts said.
“All those thing are on the table when banks tighten their standards,” said Michael Taiano, senior director, North American Banks at Fitch Ratings.
“The longer the liquidity uncertainty persists, the more there is a potential for banks to rein in their lending,” he noted, later adding, “When the storm clouds start to build and uncertainty in the market starts to build, at the heart of it, they are risk managers.”
“‘The longer the liquidity uncertainty persists, the more there is a potential for banks to rein in their lending.’”
“Initial reactions by issuers will be to more closely review new applicants for their credit cards and raise the bar on creditworthiness,” said David Robertson, publisher of the Nilson Report, a subscription-only payment card industry trade journal that does not accept advertising. Card issuers will also spot “weak” and “at-risk” accounts” and prepare to raise prices, he added.
Slightly higher fees and shorter durations before the rates kick in on 0% balance transfer offers are other ways for card issuers to handle risk — without hurting demand, said Matt Schulz, chief credit analyst at LendingTree.
Such changes would come at a bad time. Americans are increasingly turning to credit cards as they pay for the rising price of everything from eggs and lasagna to car insurance and rent.
Nearly six in ten people said they needed credit cards to make ends meet, according to a LendingTree survey released earlier this week.
Americans had $968 billion in credit-card debt as of 2022’s fourth quarter, surpassing a pre-pandemic high of $927 billion.
On Friday, stock markets were again sustaining losses. The Dow Jones Industrial Average
DJIA,
-1.13%
was down more than 300 points in late morning trading, with frayed nerves still showing even after a rescue line to First Republic Bank
FRC,
-26.81%,
one of the regional banks under pressure.
A day earlier, stock markets finished sharply higher after 11 major U.S. banks banded together to give a $30 billion capital infusion to First Republic Bank
FRC,
-26.81%.
Credit Suisse
CS,
-6.71%
shares were lower Friday; the Zurich-based bank’s shares rose Thursday after the bank said it would tap the Swiss national bank for $54 billion.
Last week, California regulators closed Silicon Valley Bank and the Federal Deposit Insurance Corporation took it into receivership after a run on the lender, which mainly served tech sector start-ups. Silicon Valley Bank was in a liquidity crunch, reeling from paper losses from high-quality, rate-sensitive mortgage and Treasury securities when depositors wanted their money back.
On Sunday, New York regulators closed Signature Bank and the FDIC stepped in. At both banks, depositors got access to all their money, regardless whether the amounts surpassed the FDIC $250,000 coverage limits, federal government regulators said.
Tighter lending standards
Analysts at Goldman Sachs GS and Morgan Stanley MS said in notes on Thursday that they are anticipating tighter lending standards coming for the economy. The notes are taking the broad view of lending to businesses and households.
But a quarterly survey of bank loan officers zeroed in on credit cards. More than one quarter (28.3%) of senior loan officers told the Federal Reserve that during the fourth quarter of 2022, they “somewhat” tightened their credit standards when considering credit card applications.
Those steps included higher minimum credit-score requirements and tightened credit limits, the survey noted.
One quarter earlier, nearly 19% of the surveyed loan officers said they somewhat tightened standards.
“‘Initial reactions by issuers will be to more closely review new applicants for their credit cards and raise the bar on creditworthiness.’”
When the Federal Reserve increases its benchmark interest rate — something the central bank has been doing since last March — Schulz said credit-card issuers can increase APRs on new offers in a matter of days.
The average APR on a new offer was 23.55% in February, ranging from approximately 20% to 27%, according to LendingTree data.
It’s difficult to say how fast the tighter standards would filter into consumer credit-card offers, Schulz said. But it could be quick, he added.
“At minimum, you may have people in a lot of conference rooms in a lot of places talking about things they can do to minimize their risk,” he said.
Major credit card issuers, including JPMorgan Chase & Co.
JPM,
-3.46%,
American Express
AXP,
-2.58%,
Citigroup
C,
-2.98%,
Capital One
COF,
-3.42%
and Discover Financial Services
DFS,
-3.27%,
did not respond to a request for comment. A spokesman at Bank of America
BAC,
-3.68%
declined to comment.
They are the top six issuers of general purpose credit cards in the country, according to the Nilson Report.
Consumers are getting squeezed
So can consumers afford a more costly card with higher rates and less purchasing power?
“If they are getting squeezed by inflation and needing to use credit cards, at some point, you worry about delinquencies and, at some point, them not being able to pay the balance,” Taiano said.
During the fourth quarter, last report on household debt from the New York Fed showed around 4% of credit card debt was over 90 days behind. The upswing is more pronounced for borrowers in their 20s to 40s, researchers said.
As a whole, these late-stage delinquencies have been rising for a year, but are still below pre-pandemic levels.
“‘The job market is the key to the whole thing. If suddenly unemployment spikes, then really all bets are off.’”
Credit scores and employment are closely tied, Taiano noted. Someone with a steady paycheck can pay bills, and lenders will review that pay history when they consider a credit-card application.
In February, the economy added a larger-than-expected 311,000 jobs and the jobless rate stood at 3.6%.
“The job market is the key to the whole thing,” Schulz said. “If suddenly unemployment spikes, then really all bets are off.”
“We wish that everybody had a fully stocked emergency fund, but that’s just not how life is for an awful lot of people. Their access to credit is important when emergency strikes,” he said.
Market Watch
Read More
