5 ways coronavirus clobbered access to credit

May 21, 2020 10:46 AM

Unlike past economic recessions where businesses and consumers have had to adjust their payment habits and debt levels over the course of months or quarters as the economy shrank, the coronavirus-induced economic crisis has forced many to make much more abrupt financial adjustments.

Despite the gradual return to work occurring in many states, there are over 36 million Americans who have filed for unemployment since mid-March, according to the Department of Labor. This creates a massive risk for card issuers, and a massive shift in demand for consumers seeking credit.

As the global pandemic has already infected over 1.5 million Americans according to Johns Hopkins, there is the potential that this number could quickly climb if businesses and consumers do not follow CDC safety guidelines and social distancing rules as state economies reopen. A spike in new cases could cause a boomerang effect of renewed businesses closures and higher unemployment levels that could impact the credit card market.

CORONAVIRUS IMPACT: ADDITIONAL COVERAGE

Traditionally, consumers tend to pay down credit card debt in the first quarter of each year following their holiday shopping sprees. According to the Federal Reserve Bank of New York's first-quarter study on household debt this year, consumer credit card balances rose in the fourth quarter of 2018 by $30 billion before falling by $20 billion in the first quarter of 2019.

What was different in the first quarter of 2020, aside from the coronavirus, was that credit card balances were reduced by $40 billion compared to the $20 billion reduction in the first quarter of 2019. Balances had risen by $50 billion in the fourth quarter of 2019, so the net effect after the paydown is that the current level of credit card debt still exceeds the once all-time high of $870 billion reached in the fourth quarter of 2008 — just as the U.S. economy entered a recession.

Reductions in consumer spending and credit line cuts by card issuers during the recession caused total balances to fall by over $200 billion in the following three years. After reaching this low, it took more than seven years for total balances to regain their former size. Could the coronavirus presage a potential long-term drop in total credit card balances?

It’s possible, but with some card issuers still seeking to grow total debt, it may not happen unless the economy gets worse. There are still marketing efforts underway to grow total debt through either 0% APR balance transfers from Citi (0% for 21 months) or with long-term introductory purchase APRs from Wells Fargo (0% on purchases for 18 months).

The shift in consumer spending has taken a quick turn away from large purchases and vacations over the last fourth months. According to the Federal Reserve Bank of New York's SCE Household Spending Survey, consumer spending on vacations for the four months of January through April halved, with only 12.5% of consumers making a travel purchase compared to 25.2% making such a purchase between September through December 2019.

“Given the current situation with coronavirus and the economy, consumers should avoid spending more than they can pay off in a month. That may mean waiting to buy big ticket items or that summer vacation. Instead they should be only spending on everyday items that they can pay off at the end of the month,” said Nathan Grant, senior credit industry analyst at Credit Card Insider.com.

Large purchases made by consumers between January and April 2020 also fell, albeit not as much as vacation purchases did, dropping by almost 19% compared to the September to December 2019 period.

There is one potential wrinkle in the prospects for long-term vacation travel spending growth that may come around to harm the industry, or at least continue to suppress demand after the coronavirus pandemic is over — refunds. While millions of travelers have had their vacation plans cancelled or postponed due to the pandemic, many consumers are finding it difficult if not impossible to get refunds and are being given future travel vouchers instead. Refund travel policies and treatments could lead to more last-minute bookings in the future as well as favor airlines and hotels that have better travel refund policies.

Demand for many forms of lending fell precipitously during the first few weeks of the national emergency being declared, with the top two being auto loans and credit cards. Based on data from the Consumer Financial Protection Bureau’s COVID-19 Special Issue Brief, consumer demand shrank in the successive weeks during the month of March.

Using the first week of March (1 - 7) as a baseline, demand in credit card applications (in the form of credit inquiries to bureaus) fell by 6.8% in the second week, followed by a 24% decline in the third week and a 39.7% drop in the fourth and final full week of March. In other words, there were almost 40% fewer credit card applications between March 22 - 28 when compared to March 1 - 7.

Auto loans took an even steeper dive during this time period, with the final week of March registering over a 52% decline in loan applications. In contrast, demand for mortgages did not begin to fall until the third week of March (15 - 21) dropping by 17.6%, and 26.9% in the fourth week of March.

“Right now consumers want to lean more on their existing credit cards to help them through the lean times,” added Grant.

The drop in credit card applications was almost equally matched, if not exceeded, by the drop in newly opened general purpose and store-branded credit cards for the first month after the national emergency was declared.

According to a May 2020 survey from CompareCards by LendingTree, the number of new general purpose credit cards opened per 100 people during the 30 days between March 15 and April 15 was just 1.7, down from 6.4 for the same period in 2019, 5.7 in 2018 and 5.6 in 2017. This represents a drop of over 73% in new Visa, Mastercard, Discover and American Express credit cards opened in the first month of the coronavirus crisis.

In the same CompareCards survey, newly opened store-branded credit cards (which can only be used at the retailer and its associated brands) fell by 75%. Only 0.6 new store branded credit cards were opened per 100 people between March 15 and April 15, 2020, compared to 2.4 cards per 100 people during the same time period one year earlier.

One obstacle for store-branded credit cards is the recent spate of retailer bankruptcies which are rendering them almost worthless. In recent weeks Neiman Marcus, JCPenney, J. Crew, Modell’s Sporting Goods and Stage Stores have all filed for bankruptcy ,with many liquidating stores instead of reorganizing for a comeback.

The fast pace of job losses and reductions has rung the alarm bells at many card issuers. Instead of waiting months before closing inactive credit card accounts or reducing credit lines to potentially risky consumers, many card issuers have quickly taken corrective action compared to their approaches in the 2008-2010 recession.

According to a CompareCards.com survey, 25% of consumers have reported that they have had their credit card lines reduced or had inactive credit card accounts closed in the last 30 days, representing the month of April. These line reductions and account closings occurred across younger and less financially stable generational age groups including Gen Z, millennials and Gen X. Between 35% and 37% of each of these groups have been impacted.

In contrast, only 8% of Boomers had their credit lines reduced or inactive credit card accounts closed in the past 30 days, according to the survey.

In April, Discover acknowledged in a regulatory filing that it’s begun reining in lines of credit on its existing credit card customers. This announcement came one day after Synchrony Financial reported that it would more actively manage its customers’ credit lines to stem future losses. Synchrony is the issuer for retailers such as JCPenney, Gap, American Eagle and Chevron.

Large issuers such as Chase and Wells Fargo are examining all aspects of their consumer lending portfolio. Wells Fargo announced in early May that it was no longer accepting home equity line of credit applications following an earlier move by Chase in April.