Some credit card issuers may be tempted to loosen underwriting standards this holiday season as credit card loss rates hover at record low levels. But such policy shifts could have more far-reaching implications on issuers’ bottom lines than just a few years ago, one analyst warns.
“Issuers are taking a bigger risk than in the past by stepping up promotions and tempting consumers with deals to spend more on their credit cards as we head into the holiday season with the hope that higher spending will lead to balance carry-over,” Dan Geller, executive vice president of San Francisco-based Market Rates Insight Inc., tells PaymentsSource.
Issuers through the third quarter grew more aggressive with direct mail solicitations and rewards deals, Mintel Comperemedia data show.
But if issuers also loosen their risk-management policies to stimulate card spending after tightening them sharply following widespread losses during the recession, they could see their profits plummet even more rapidly than in the past because of significant changes over the past three years in profitability levers, Geller contends.
The primary reason is that the proportion of credit cardholders paying off their bills in full each month has grown significantly, causing issuers’ profits from interest to decline as their overall pool of receivables has grown smaller, Geller explains.
New rules associated with the Credit Card Accountability, Responsibility and Disclosure Act that went into effect last year restricted issuers’ ability to increase consumers’ interest rates on outstanding balances, dampening profits, he notes.
And in response to the recession, consumers subsequently pulled back on borrowing and began paying off balances more rapidly than they did previously.
“In the last couple of years, more people started paying off the whole enchilada when they got their credit card bill in the mail, which has cut so far into issuers’ profits that this time around, if they loosen credit they can’t afford to sustain losses like they did before the recession,” Geller says.
American Express Co. in October said customers who pay off their credit card bills in full each month now represent 29% of its total lending portfolio, up from 16% in 2008.
The combined effect of issuers tightening credit card underwriting policies and consumers shifting away from revolving balances drove credit card charge-off rates to record low rates through the third quarter. But delinquency rates are beginning to creep upward, a harbinger of rising risk, analysts note. Credit card charge-off rates peaked during the first quarter of 2009 at 11%, Fitch Ratings Inc. says.
Even private-label retail cards, which historically have higher charge-off rates than bankcards, are hitting record lows, Fitch said in a Nov. 14 report. Average retail credit card charge-off rates fell to 7.78% during September, down 89 basis points from 8.67% in August, Fitch said. Delinquency rates on accounts at least 90 days past due ticked up 4 basis points to 3.36% from 3.32%, Fitch said.
“Credit card issuers are in a tricky spot because they need consumers to make purchases and revolve balances in order to earn profits, but deciding which customers to extend credit to, and how much to change their underwriting policies, is becoming a difficult question,” Geller says. “Issuers are going to have to find some kind of balance where they are extending just enough credit to get certain consumers to revolve a balance but not going so far that losses will spike again because that could put them out of business this time.”
