How demand for new credit cards plunged during the coronavirus pandemic

July 31, 2020 10:36 AM

Cash usage dropped much lower due to the coronavirus pandemic, and it appears that credit cards may be exhibiting some signs of abandonment as well.

Consumers are dialing back on applying for credit cards and reducing balances possibly because there are fewer opportunities to spend money, but perhaps also in case there is a stronger economic downturn later this year or next.

Meanwhile, card issuers are bracing for a potential financial storm as a wave of mass layoffs looms on the horizon, especially in airline, hotel and other industries. As a result, some card issuers are looking at their existing portfolios and taking preventative measures, such as trimming inactive cards. Even digitally-focused companies like Apple, which reported satisfactory adoption for its Apple Card, observed lower spending across the board.

“In many cases, if a card isn’t being used, a bank isn’t making any money off of it,” said Matt Schulz, chief credit analyst at CompareCards by LendingTree. “That’s not a huge deal in good economic times, when delinquencies and defaults are rare, but when things go south, the calculus changes. Issuers then see that card and its unused available credit as little more than unnecessary risk, so they may choose to reduce the card’s spending limit or close it altogether. That’s what’s happening today and will likely continue to happen in the near future.”

CORONAVIRUS PANDEMIC: ADDITIONAL COVERAGE

Starting in mid-March, when President Trump declared a national state of emergency due to the COVID-19 pandemic hitting U.S. shores in force, consumers began to re-evaluate their future credit needs and did something unprecedented — they pulled back on new card applications.

According to data from Equifax’s Weekly U.S. National Consumer Credit Trends report in July, general purpose bank credit card originations (approvals) were tracking steady at the 2019 levels until mid-March, averaging about 1.2 million new cards a week. By the week of March 29 this had fallen to 672,000 new accounts opened, and has continued to drop to less than 500,000 new cards per week. Equifax notes that the last eight weeks of its data often get revised, with the last four weeks the most likely to be revised due to lags in data reporting.

It’s not that issuers changed their underwriting standards; it’s that demand has fallen. Case in point is that the average FICO score of approved credit cards dropped after the national emergency declaration, indicating that issuers hadn't yet narrowed their underwriting standards.

The average FICO approval score stayed steady between April 5 and May 17 at a range of 670 to 685. It was only until the week of May 24 that issuers began to tighten underwriting standards that the average approved FICO scores went up. The average FICO score in the latest week is over 725, although that is likely to fall as the numbers get adjusted by Equifax.

As late as January, card issuers were increasing consumers’ credit limits without asking consumers in the hope of spurring credit card spending — that’s a clear sign of banks seeking more balances and revenues.

What happened to the open-loop credit card market as a result of demand has been mirrored in the private label market (i.e., cards that can be used at a single store). Demand in 2020 was slightly below 2019 levels until the national emergency, and then fell by over 50% starting in the week of March 22.

Just like with open-loop credit cards, average FICO scores for approved private-label card accounts also fell, as fewer consumers with better credit were applying. Average approved FICO scores bottomed out in the week of April 5 and stayed steady until starting to rise in the week of May 17, just like the bank card market.

There is one unique factor affecting demand in the private-label card market that doesn’t exist in the general bank card market — in-store card sales. This is most often experienced when shopping in a retail store and the clerk offers the customer an instant discount for applying for a credit card at the time of purchase.

The fact that most retail stores and malls closed after the emergency declaration — and with many still closed or closing again after reopening — the impromptu private-label card sales process has been largely cut off. However, when shopping at merchants online, impromptu card offers still exist.

It should be noted that for approved private-label cards, the credit limits have risen since mid-March, while in the open-loop credit card market they have begun to fall in the last two months.

Almost like the ticking of a grandfather clock, the steady increase in consumer revolving credit, which is almost entirely on credit cards, continued to rise year-after-year. Only in major recessions do the balances slow their rise or even decrease. However what the market has experienced in the last few months has been rather dramatic, plunging consumer credit balances below 2016 levels.

According to the Federal Reserve Consumer G.19 Credit Report released on July 8, the end of May saw $953.2 billion in revolving consumer credit outstanding balances, landing $7 billion less than the peak in 2016.

The drop in revolving balances is likely due to a variety of factors, but at the end of the day, bank credit card portfolios will earn significantly lower revenues. According to the Federal Reserve Bank of St. Louis, the average interest rate charged on credit card accounts being assessed interest in May was 15.78%. Given that card interest rates are multiple times higher than those in mortgages, auto loans or even student loans, this drop in revolving debt is potentially disastrous to the major card lenders such as Chase and Bank of America.

Another potential cause for concern is that the revolving debt is being carried by higher interest-bearing accounts which are more likely higher risk. Case in point is that four in 10 borrowers carry more debt than they did just three years ago. The average interest rates on all credit cards in May was just 14.52%, according to the Federal Reserve. So the consumers actually paying interest were doing so at a 126 basis point-level higher than the market average.

Despite banks’ previous hunger for new and active credit card owners, they have reviewed their existing portfolios and trimmed the edges in case of a financial crisis. Unlike the 2008-2010 great recession, which many banks did not see coming until they were in the thick of the crisis, this pandemic has sent clear signals that this fall could be very difficult, especially if the airline and hospitality industries cut tens of thousands of workers.

Based on data from a CompareCards by LendingTree Survey, one-third of consumers reported that their credit card limits had been reduced in the last 60 days (the survey was completed July 13) and an additional 25% had at least one inactive credit card closed.

“Card issuers will likely keep slashing credit limits and closing cards until the economic situation in this country gets much, much better,” said Schulz. “It may or may not happen quite as often as it has to this point, but it almost certainly will continue to happen, at least for a while. The truth is that the huge spike in unemployment, along with several other factors, have made it really hard for banks to know who is a risky borrower and who is not. When banks can’t figure that out, they tend to get very, very cautious with their lending.”

In the evaluation of potential risk, FICO scores are often a major indicator of potential default, but so is the age of an individual’s credit history. While this is only one element of a FICO score, when looked at alone, it offers an issuer a unique singular view on the potential maturity of a borrower. Unfortunately, long credit histories also favor older consumers, so it should be no surprise that when card closures and credit limit decreases happen, it’s the younger consumers that suffer the most.

According to data from a CompareCards by LendingTree Survey, about half or more of Gen Z and millennials saw their credit limits reduced since the pandemic was declared a national emergency in March. Roughly 40% of those two groups also experienced one or more credit cards being closed. In comparison, Boomers and the silent generation experienced almost no card account closures and few credit limit reductions over the same period of time.

In many cases, issuers will target inactive cards for closure, rather than cards carrying a balance or cards actively being used, as these generate revenue — unless the account is in default or the user has violated the cardholder agreement in an egregious manner.

The biggest factor driving these changes is the sentiment of the banks in preparation for future delinquencies.

“They’re worried about delinquencies and defaults. Both of those rates had been around historic lows for several years before the pandemic hit,” added Schulz.

While the credit limit reductions have affected a large number of consumers, the overall impact has been rather small, with over half (54%) experiencing reductions of $1,000 or less to their credit line. Based on data from a CompareCards by LendingTree Survey, only 7% of consumers experienced reductions of $10,000 or more and just 15% saw limit reductions in the range of $5,001 to $10,000.

About 50 million cardholders saw accounts closed or limits reduced between late March and late April, and another 70 million cardholders were impacted between mid-May and mid-July, according to CompareCards.

“The fate of the extra $600 a week in unemployment benefits will go a long way to determining what delinquency rates and default rates look like in coming months,” said Schulz. “That extra money has allowed many jobless Americans to reduce debts, build savings and do far more than just make ends meet. Without it, however, we are very likely to see a significant spike in late payments in coming weeks and months.”