Credit cards slash $99 billion from spending limits during pandemic

The notices went out to one cardholder after another, sparking complaints. Big banks were trimming credit limits by hundreds or thousands of dollars as the COVID-19 pandemic spread. None were saying how far it would go.

The answer: The 14 lenders that dominate U.S. credit cards slashed $99 billion from their customers’ spending limits in 2020, mostly affecting financially troubled households. It’s the equivalent of cutting $2,000 in financing to 50 million people — many of whom lean on cards for emergencies.

Michael Nagle/Bloomberg

Capital One Financial, known for its “What’s in your wallet?” slogan, led the way by paring $30 billion from limits by the end of 2020. Larger rivals Citigroup and JPMorgan Chase each saw their totals fall by $19 billion. While the retreat set off flurries of frustrated posts on social media, its scope remained a mystery because numbers aren’t typically disclosed in corporate earnings reports, with annual figures appearing only recently in arcane filings with the Federal Reserve.

The cuts threaten to exacerbate the economic divide between U.S. households. Financially healthy Americans kept their credit and are now so flush with cash — stockpiling an estimated $1.7 trillion in excess savings since outbreaks began — that some analysts expect “revenge spending” to power record consumer purchases. That would stoke economic growth.

But millions of others will emerge from the pandemic financially weakened, and catching up may be all the harder with less access to credit. Cards can provide a crucial safety net for emergencies that can create more problems — helping someone fund a car repair, for example, to commute to work.

“Low-income people have trouble surviving without their credit cards,” said Scott Schuh, an associate professor at West Virginia University who previously served as director of the Federal Reserve Bank of Boston’s Consumer Payments Research Center. “They have to have them because no one else will give them credit or they may have to pay even higher interest rates elsewhere.”

Consultants who work with card issuers say lenders’ caution made sense given skyrocketing unemployment and widespread fears about the potential impact of COVID-19 lockdowns on commerce and the economy. Extending credit to someone sliding into insolvency can make it even harder for them to dig out.

“Most issuers looked at this and thought, ‘This is going to be a disaster. We better shut this down,’ ” said Ron Shevlin, who works with community and regional lenders as director of research at Cornerstone Advisors.

U.S. credit card issuers have relatively little insight into who’s lost jobs or income since they opened accounts, unless they voluntarily inform their lender. That forces banks to make assumptions about who might fall on hard times, run up bills and default. To avoid that risk, some banks closed dormant accounts or lowered their customers’ limits to whatever level they regularly use.

By mid-2020, many banks told the Federal Reserve in a survey that their lending standards were about as high as they’d ever been in the past 15 years.

Credit bureau data shows who was affected most by such caution. TransUnion estimates that borrowers with low credit scores saw their limits reined in by a combined $110 billion. For subprime borrowers, the reduction amounted to 30% of their borrowing capacity. Meanwhile, on the other end of the spectrum, credit-card issuers expanded lines for the safest borrowers, or those with super prime scores, by an estimated $81 billion.

Goldman's expansion

Capital One said it periodically reviews and adjusts accounts, and it may close those that haven’t been used in a while. “Last year, all credit limits were kept significantly above the highest balance of the past year to ensure that customers could continue to use the card as they had been,” said spokesperson Sarah Craighill.

Citigroup said the main reason it saw total credit fall was a drop in applications for new cards, not credit-line decreases for existing customers. “Retail store closures and lockdowns had a more pronounced impact for Citi,” spokesperson Jennifer Bombardier said. That’s because a significant portion of the bank’s card business is based on partnerships with retailers and airlines.

“We regularly review customer accounts and adjust credit limits, both up and down, based on usage and behavior,” JPMorgan spokesperson Amy Bonitatibus said. “As the economy improves, we expect more customers will be eligible for increases to their credit limits.”

The 14 card giants offer roughly $4 trillion in credit, mostly to wealthy or financially stable households. Most of that is for U.S. customers, but some lenders, including Capital One and Citigroup, also lend internationally. Goldman Sachs Group, which is building a card business, was the only firm that dramatically increased total limits — raising them 64%.

Banks usually set lower caps for households with blemished credit histories or low incomes, so reductions there tend to be felt more severely. Tightening or eliminating a credit line reduces the borrower’s available financing, which in turn hurts their credit score.

It isn’t so easy for people with spotty records to replace lost credit lines. Banks offered lower limits on new subprime cards last year, cutting the average amount to $688 in the third quarter, down from $1,015 during the same period in 2019, TransUnion figures show. That means it would take three cards to replace $2,000 in lost credit. Many new cards for subprime borrowers impose startup fees or require cash collateral.

Defying expectations

The reduction in credit available to U.S. consumers contrasts with their surprising resiliency in the pandemic. Across the country, households tightened budgets and found relief in government programs that included thousands of dollars in stimulus payments to eligible families.

“Strikingly strong consumer credit has persisted throughout 2020,” Capital One Chief Executive Richard Fairbank told analysts in January. “Consumers are behaving cautiously, spending less, saving more and paying down debt.”

Severely late payments on cards fell last year from 2.49% to 1.89%, according to Equifax. Writeoffs of bad debt fell too.

Cutting credit to those who need it most has implications for the much-needed rebound in commerce.

Lower limits after the 2008 financial crisis were responsible for about 25% of the drop in overall consumption by consumers, said Schuh, who’s written a paper on the topic.