Card issuers within the past two years dramatically reduced consumers' borrowing capacity to cut the risk of losses during the recession, but new data suggests the bulk of the credit line decreases came from closing inactive card accounts, not slashing active borrowers' credit lines.
According to a report from Moody's Investors Service Inc. published Thursday, credit lines on U.S. consumer cards totaled $1.95 billion at the end of June, down 30.1% from $2.82 billion two years earlier, when credit lines peaked, Moody's said, citing data from the Federal Reserve Bank of New York. But total consumer credit card outstandings declined only 12.5% over the same period, to $744 billion from $850 billion at the peak, Moody's said.
The data indicates the majority of issuers' recession-sparked credit line reductions were not the result of cutting off available credit to active card users, Moody's analyst Jeffrey Hibbs said. "Issuers cut credit lines substantially over the past two years, but a large portion of those cuts were inactive accounts," he said.
Closing inactive accounts is a prudent method for removing potential risk during a shaky economy, but the amount of risk reduction that results from this strategy is not "as dramatic" as actually cutting active users' credit lines, Moody's said in its report. Such actions also pose little business risk, while cutting active borrowers' credit limits "is a far trickier proposition" that could lead to reduced card spending and a higher probability of borrower default, Moody's said.