Combine the growing fears of a U.S. recession with the recent spikes in delinquencies and charge-offs, and it is no wonder credit card issuers worldwide have become increasingly cautious with both potential and existing cardholders.
Regardless of whether a recession technically exists, consumers are feeling significant economic pressure, Liam McGee, president of global consumer and small business banking at Bank of America Corp., indicated during a presentation at the UBS Global Financial Services Conference in May.
"Home-price depreciation has left little equity for consumers to borrow against," McGee said. "This is particularly troubling since the savings rate has been on the decline since the mid 1980s, (and) fuel and food costs are at an all-time high."
In the second half of this year, McGee continued, the unemployment rate is expected to remain high, nearing 6% and higher in select states. And credit quality likely will deteriorate further.
Indeed, the days of granting easy, sometimes reckless, credit are over, at least in the near future, for card issuers in many parts of the world. Institutions have tightened standards for issuing credit cards to new applicants, and they are being more cautious in how they manage existing balances.
But careful, creative issuers still can position themselves for bigger, healthier card portfolios. Some are trying to do just that, both in countries with emerging credit markets and in underbanked-but-creditworthy populations of countries that otherwise are saturated with consumer debt, observers say.
"At the end of the day, issuers are in the risk-taking business," and the right calculated risks can lead to healthier profits in the long-run, says Edmund Tribue, senior vice president and global practice leader for risk management at MasterCard Advisors.
The United Kingdom payments association APACS reports that the rate of UK approvals for new credit cards was 50% in 2007, down from 70% in 2006.
Not surprisingly, card credit also is tighter now in the United States, the epicenter of the subprime mortgage quake that triggered a variety of worldwide economic aftershocks.
In the latest quarterly survey of senior bank-lending officers the U.S. Federal Reserve conducted in April, 67% of respondents said their banks' overall credit standards for approving applications for cards from individuals and households had remained basically unchanged. That percentage is down considerably from previous quarters.
In the Fed's January survey, 90% of respondents said their banks' credit card-approval standards had remained unchanged, and in its October survey nearly 97% said approval standards had remained unchanged.
None of the respondents said in the April, January or October surveys that their banks had eased card-issuance standards. And though 2.4% of lenders said in the January survey they had "tightened considerably" their standards for issuing credit cards, none of the respondents reported significant tightening of issuance standards in the October or April surveys.
The change over the past three quarters in standards for approving credit card applications is most dramatic in the "tightened somewhat" responses from card issuers.
In April, 32% of banks said they had tightened somewhat the overall standards for approval of credit card applications, four times the 7% who gave that answer in January and 10 times the 3.2% who gave that answer in October See chart.
On the question of changes to the minimum credit scores required for issuing new credit cards, nearly 65% of all senior loan officers told the Fed in April that their minimum-score requirements had remained unchanged from the previous quarter. Nearly 80% of loan officers said in the January Fed survey that they had kept minimum-credit scores the same.
But nearly 30% of senior lending officers told the Fed in April they had slightly higher credit-score requirements for prospective cardholders, up from 18% who said in January they had slightly raised their minimum-score requirements.
In the past, the average FICO score that would qualify a consumer as prime to most issuers was 680, Tribue says. Consumers with scores between 680 and 640 were considered nonprime, and below 640 were subprime.
"With a number of lenders worldwide, those ranges are shifting upwards," Tribue says. To qualify as a prime borrower, 700 is the new 680, and to eke into subprime, 660 is the new 640, he says.
For both new and existing cardholders, banks also are pulling back their credit limits.
Asked how their banks had changed credit limits on new and existing card accounts for individuals and households, 70% of senior lending officers told the Fed in April their banks had kept credit limits about the same. More than 92% reported maintaining the same credit limits in the Fed's January survey.
However, nearly 30% of lending officers said their banks had lowered credit limits "somewhat," triple the 10% who gave that response in the January survey.
Banking institutions likely will continue to face deteriorating loan quality in the near future, Donald L. Kohn, Fed vice chairman, suggested during a June 5 Senate Committee on Banking, Housing and Urban Affairs hearing. "House prices are still declining sharply in many localities, and losses related to residential real estate, including loans to builders and developers, are bound to increase further," he said. "In addition, weak economic conditions could well extend problems to other segments of lending portfolios, including consumer installment or credit card loans."
Kohn emphasized that financial institutions must be prepared "for the possibility that liquidity conditions become tighter if uncertainties in the capital markets fail to subside or if credit conditions deteriorate significantly."
Because of these circumstances, the Fed anticipates the number of banks with "less-than-satisfactory supervisory ratings will continue to increase from the relatively low levels that have existed in recent years," Kohn said.
As president of the Latin America and Caribbean division of credit bureau TransUnion, Maria Olga Rehbein has her own take on the old economic cliché. In her version, "if the U.S. gets a cold, we get pneumonia."
The extent of the impact of the U.S. economic malaise on other countries in the Americas varies by proximity, immigration, trade agreements and other factors, Rehbein says from her office in Colombia. Mexican card issuers began getting nervous last year as they saw their own delinquency rates start to rise along with delinquencies in the U.S.
"There was a lot of fear they were going to be hit by the U.S. economy," Rehbein says. "The whole of Central America has slowed down."
Lenders and lawmakers in many parts of Central and South America are working to establish more-sophisticated credit-scoring systems to keep up with expanded use of credit, Rehbein says.
The Costa Rican government only allows sharing of negative credit information, such as missed payments or defaults, not the positive information that can help lenders keep tabs on how many lines of credit a consumer has obtained, Rehbein says. And even countries where lawmakers allow credit bureaus and lenders to share both negative and positive credit information, such as the number of credit lines a borrower is paying on time, many lenders are reluctant to share data they fear could give competitors too much insight into their operations, she says.
Chile passed a law some five years ago to limit credit-data sharing to only negative information, Rehbein notes. But Chileans hold some 12 million bank-issued credit cards and several million more issued by retailers, and revolving consumer debt now has reached a level that is making lawmakers there nervous enough to revisit the idea of allowing both positive and negative information.
"[Chilean lawmakers] conducted a study with the World Bank and know they could be running some very important macroeconomic risks," Rehbein says. "Because there has been no positive [credit] sharing, they could be having a crisis of overindebtedness."
Lawmakers in other regions of the world are nervous, too.
South Korea's Financial Supervisory Service, a regulatory agency, reportedly is exploring ways to keep credit card issuers there from signing up large numbers of new cardholders who might have trouble paying their bills. Kim Jong Chang, the agency's governor, outlined those goals at a meeting in May with financial-institution executives, according to the Korea Times newspaper.
Agency officials declined to discuss the comments further. But Sunil Devmurari, a business-development account manager with United Kingdom-based research company Euromonitor International, says comments from the agency's governor appear inspired, at least in part, by memories of South Korea's credit card crisis earlier this decade.
"Issuers were saddled with massive debts when a large proportion of credit cardholders defaulted on payments, and many major issuers had to receive help from the government," he says. "Given this history, it makes sense for the government to restrict issuers from gaining [a] large volume [of] new accounts."
Issuers are wise to be even more careful about extending credit in these uncertain economic times, Tribue says. But issuers should track geographic economic differences, such as unemployment rates in different parts of a given country, he says.
"While you're looking at one part of your portfolio tanking in Mississippi, it may be profiting in New York," Tribue says.
And it still is a good time to extend credit to some cardholders with thin or even blemished credit files who are paying bills on time and keeping themselves from getting overextended. Issuers have to work harder to keep those cardholders from getting into trouble by setting higher late fees and interest rates on new cards, and keeping credit limits and access to cash low, Tribue says.
But cardholders who use their cards wisely should be rewarded, he says. Credit limits can increase along with credit scores, for example.
"You have to be ready to offer graduation programs," Tribue says. "When a subprime customer enters the prime population, you'd better offer them a prime product, or you're going to lose them to a competitor."
Card issuers rightly are being more cautious about granting credit, but smart lenders will position their portfolios to grow when the economy improves. CP