An earlier version of this story identified the wrong company that conducted the survey and provided incorrect link to the survey.
As the coronavirus pandemic wreaks havoc on jobs and the economy, Americans are now less likely to get a new credit card as banks pull back on lending and fewer applications come in.
Newly opened credit cards fell by 73% from March 15 to April 15 this year versus the same period last year, according to a new report by CompareCards.com of 100,000 anonymized credit reports. Only 2.3 new cards were opened per 100 people with credit reports, compared with 8.8 new cards in 2019.
“Most likely, the cause of this big drop is more on the banks side than the consumer side,” said Matt Schulz, chief industry analyst at CompareCards, “given the growth in unemployment and the increased need for credit cards among those unemployed.”
Even if you are approved for a new card, you’ll likely get a smaller credit line. The average credit line was $700, down from $1,084 in 2019. This comes as lenders tighten credit limits on existing accounts.
“This is such a volatile time. Banks want to restrict the amount of risk,” Schulz said. “The best way they know is to reduce credit limits on current cards and to limit the size of the credit limits offered up on new cards.”
Are issuers — or consumers — pulling back?
Credit card issuers, such as Discover Financial Services, have been offering fewer cards to new customers since the pandemic started.
“We have taken swift and meaningful action to adjust our credit policies to reflect the new environment,” said Discover CEO Roger Hochschild on the company’s April 23 earnings call. “Continuing to lend but with tightened standards for new accounts and for growing existing accounts.”
But the low number of new cards is also a result of fewer Americans applying for one. Since the start of the pandemic, credit report inquiries for new credit card applications declined by 40%, according to a recent report from the Consumer Financial Protection Bureau.
While some credit card holders may be spending more while using them as an emergency fund, many also cut back on spending because of the lockdowns.
“We know that consumers aren't spending as much simply because they don't have as many places to spend,” Schulz said.
‘Push more people to payday lenders’
With fewer credit cards being issued and limits on new and existing credit lines getting reduced, some consumers may be forced to turn to more high-cost loans like payday loans, according to Schulz.
“This certainly could push more people to payday lenders,” Schulz said. “It's really important for folks who just lost their job to hold on to their credit card as a lifeline to get them through to their next paycheck or to their next unemployment check.”
Payday loans have much higher interest rates and often lead to borrowing another loan to cover expenses, according to a 2016 study from the Pew Charitable Trusts. The average payday loan requires repayment of $430 on the next payday, consuming more than a third of the paycheck of an average borrower, the study found.
“Oftentimes credit cards are emergency funds for folks who don't have much savings,” Schulz said. “While credit card interest rates certainly aren't low by any stretch, they're far better than what you would get over time with a payday loan.”