This weekend, I received a rather odd email from American Express, announcing that they were roughly doubling my credit limit. This was odd, I say, because I hardly needed a higher credit limit; the card currently has a balance of $222 on it, from travelling to New York last week. I certainly hadn’t requested such a thing. I’ll keep the higher limit, since this modestly improves my credit score, but it gives me a sort of shifty feeling. Why would they have increased my limit, unless they thought they might somehow induce me to go on a wild, credit-fuelled binge?
Apparently, I’m not the only one getting unsolicited offers of more credit: the New York Times has a piece on lenders once again plunging–or at least, dipping a few toes–into the bottom of the market:
Lenders have taken $189 billion in credit card losses since 2007, according to Oliver Wyman Group, a financial consultancy. That was a significant part of the $2 trillion or so that banks are estimated to have lost since the crisis began, and a contributor to the government bailout of the banking system.
To stem losses, lenders halted new card offers to all but their most affluent customers. At the same time, more than eight million consumers stopped using their credit cards, in a sign of the nationwide belt-tightening, according to TransUnion, the credit bureau. Millions more borrowers who still have cards have been compelled to pay down their balances, or are more often choosing to use cash.
That has had a big impact on lenders’ bottom lines. Credit cards once gave the banking industry as much as a quarter of its profits; today those profits have all but vanished and lenders are seeking ways to replace them.
Now that the losses have stabilised, lenders have set out to revive their card businesses, and mail offers to riskier borrowers are roaring back.
HSBC mailed more than 16 million card offers to this group in the third quarter of this year, Citigroup 14 million and Discover 10 million, all roughly tenfold increases over the same period last year, according to Synovate Mail Monitor, a market research firm. Capital One’s rate rose fiftyfold, to 22 million.
Many of the new lower-end cards start with high interest rates and annual fees, because new federal rules limit the ability of lenders to change the terms after payments are missed. Capital One, for example, is offering low-end cards that carry interest rates of 18 per cent or higher and annual fees of up to $50.
In all, lenders will send about 2.5 billion credit card offers by the end of the year, Synovate estimates, compared with more than six billion in 2005, the peak year. The bulk of this year’s mailings are still going to affluent people, with just 17 per cent going to borrowers with blemished credit. That compares with about 39 per cent in 2007 and a low of 7 per cent in late 2009.
The response to the card campaigns has been strong, with roughly 4 per cent of these riskier borrowers submitting applications. That is about 10 times the typical response rate for the group, though that may be partly explained by the absence of offers over the last two years.
I was in New York last week and talking to a friend in fixed-income research, who noted that things had really changed for credit card securities over the last twelve months. Consumer debt has been falling for a while, but originally, most of the decline was not from people paying off balances; it was from card issuers deciding the debt was uncollectible, and charging off the bad balance.
According to him, that’s now changed. The widespread worries that the mortgage delinquencies would eventually spill over to credit cards turned out to be overblown, and default risk has been declining for a while. The value of outstanding revolving credit balances (read credit card debt) is falling because people are actually paying down balances, which means that credit card issuers have gone from losing money on bad debt, to losing money on people who don’t carry such large balances any more.
I presume that this is what’s behind the greater willingness to extend credit to those with spotty payment histories. And it looks like consumers will be paying for the privilege–with the new rules about interest rates and fees in effect, banks are charging the poorest risks a lot more up front for the privilege of having credit.
And will they bite? Just as alcohol venders make most of their money off of a few heavy drinkers, my understanding is that credit card companies make most of their money off of . . . well, the people who use their product the most, with high balances and multiple cards. Those people were essentially cut off during the financial crisis, as banks became frightened of lending to them. Now that they’re relaxing a little bit, will credit card balances continue to fall?
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