As the coronavirus pandemic wears on, costing tens of millions of jobs, lenders are worried Americans won’t be able to pay back their loans.
That’s leading to stricter qualification requirements and lower credit limits, making it more difficult for Americans to access cash at a time when they may really need it.
One in 4 credit cardholders said their lenders reduced their credit limit, closed their card altogether, or both in the past last month, according to a new report from CompareCards.com that surveyed 1,039 credit cardholders.
That’s more frequent than in 2008 during the Great Recession, when 1 in 6 cardholders reported cut limits or involuntary account closures, according to a 2010 study by Phoenix Synergistics, a market research firm for financial services companies.
Mortgage lenders are also getting conservative, requiring higher credit scores and rejecting new applications for home equity lines of credit.
“Thirty million Americans applied for unemployment in the last six weeks, that number dwarfs the numbers of folks who lost a job in the entire Great Recession,” said Matt Schulz, chief industry analyst at CompareCards. “With that much job loss in such a crazy, short amount of time, it becomes very hard for lenders to know who is still safe to lend to and who’s not.”
The moves by credit card issuers come as consumer debt in the U.S. reached a historic high of $14.1 trillion in 2019, up nearly $2.3 trillion since the height of the financial crisis, according to Experian. Credit card debt accounted for $829 billion of that total, also a record high.
But then the coronavirus pandemic happened.
“Any time there's a big economic crisis or recession, it's pretty common for banks to pull back a little bit and restrict credit,” Schulz said, noting that the consumers most likely targeted are those with cards that haven’t been used very much.
If banks are getting revenue from a card, it’s probably less likely to be cut, Schulz said.
In 2008, issuers slashed limits by a quarter and up to half when their exposure to potential default heightened, said Bill McCracken, president of Phoenix Synergistics. The expectation then was that the recession would last a long time, while now, the pandemic-induced slowdown is harder to define.
“It's a little unprecedented,” McCracken said. “But if it drags out, it could easily be somewhere between 20-25% all the way to 50% [for credit limit cuts].”
Fewer new cards
Lenders are also offering fewer cards to new customers. For instance, Discover Financial Services is easing efforts to issue new credit cards as a reaction to the financial impact from the coronavirus pandemic, according to a regulatory filing by the company from April 22.
“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.”
Synchrony Financial — a company which provides retail credit cards to American Eagle, Banana Republic, Gap, and others — also announced a similar measure in an earnings call on April 22. The company said it’s also reconsidering the credit limits of its customers by looking at their creditworthiness.
Stricter mortgage standards
It’s not just credit card issuers getting jittery. Mortgage lenders, both big and small, are raising their credit score requirements for borrowers to hedge against future losses.
JPMorgan Chase this month raised its minimum credit score to 700 and now requires a 20% down payment for most mortgages.
This has a trickle-down effect to smaller lenders that originate mortgages in areas where the bank doesn’t have a presence, but then later sells them to Chase for servicing.
“I have to follow Chase’s rulebook,” said Kevin Leibowitz, president at Grayton Mortgage, a lender with offices on both coasts. “In the current environment, they have tightened the credit box. They’re not doing loans below 700.”
Lenders have also raised credit score requirements for FHA loans, known for accepting borrowers with scores as low as 500 with down payments of 3%. But many firms now require a score as high as 660, according to an investigation from HousingWire, a trade publication for the mortgage industry.
Adding to the pressure is an uptick in forbearances. Recent data from the Mortgage Bankers Association showed that 7% of mortgages nationwide were in forbearance, or about 3.5 million borrowers nationwide.
“The lenders are hurt on the loans they made in the last two or three years,” Leibowitz said. “They’re just making sure the [new] loans now are more robust.”
No more HELOCs
Major lenders are also rolling back on home equity lines of credit, or HELOCs. These credit lines, which are backed by a home’s equity, can be tapped at any time. HELOCs can serve as a way to consolidate high-interest obligations, because they typically carry lower rates than credit cards and personal loans.
But getting on is tougher during the pandemic era. Chase recently announced it would temporarily pause on issuing new HELOCs. A couple days later, Wells Fargo followed, announcing it would stop credit lines on April 30.
However, Wells Fargo isn’t cutting back credit limits for existing HELOC customers — for now, a company spokesman told Yahoo Money.
“The decision to temporarily suspend the origination of new HELCOs does not directly impact our existing home equity customers,” the spokesman said. “And we can’t speculate specifically about future actions we may take relative to existing home equity loans.”