Faced with a tsunami of losses and defaults, US credit card issuers
are snatching away credit lines and closing inactive accounts,
according to a recent report from Moody’s Investor Service. But, as
Davis reports, issuers have to achieve a delicate
balancing act between risk and reward.
With one eye on new US card regulations
and the other on the wobbly economy, US issuers are beginning to
squeeze credit lines like never before. Or are they?
According to a recent report from Moody’s
Investors Service, a review of the latest data from the US Treasury
shows that credit card companies have been aggressively slashing
credit lines – over $480 billion since October 2008 for just the
five largest issuers.
At the same time, Moody’s examination of data
for the primary credit card trusts of these same issuers reveals
that average credit lines are increasing.
Moody’s analysed data which Bank of America,
Citigroup, JPMorgan Chase, Capital One and American Express have
submitted to the US Treasury Department since last October as part
of their participation in the Treasury’s capital purchase
Many observers predicted a dramatic reduction
in credit lines as a reaction to the new credit card reforms
ushered in earlier this year, and on that front, the largest
issuers are answering the bell, but even as they tighten
outstanding credit lines, they are mostly coming from inactive
By closing inactive accounts with lower than
average credit lines, the average credit line for the remaining –
and presumably active – accounts in the portfolio has risen.
“We posit further that, although closing
inactive accounts is a prudent and easy way to remove potential
risk, the amount of risk reduction is not as dramatic as the
headline-grabbing billions suggest,” wrote Moody’s analysts Jeffrey
Hibbs and William Black.
Inactive accounts pose quandary for
Closing inactive accounts poses
little business risk for issuers. Closing active accounts, on the
other hand, raises the risk of adverse attrition, which could lead
to reduced spending and a higher probability of borrower
In a challenging risk environment, issuers
have to strike a balance between business risk and credit risk as
they navigate the current credit cycle. This explains the current
focus on inactive accounts, which are dropping quickly as the
largest issuers try to present a healthier portfolio to the
While issuers do not uniformly report on
inactive accounts, the Moody’s report estimates that they comprise
a large proportion of most issuers’ total book of accounts. In a
review of recent trust filings of the major issuers, Moody’s found
that these ‘zero-balance’ accounts represent approximately 52
percent of total trust accounts, down from recent peak levels in
early 2008 of 56 percent.
In aggregate, the five largest US issuers have
reduced their lines by over 15 percent since October 2008, with
Citi and Bank of America clearly leading the way for the group.
As inactive accounts are closed, the Moody’s
report finds that the credit line available to the average borrower
has actually increased for most trusts over the past three-plus
years, and since 2008 as well.
“While some increase may be expected to
maintain pace with inflation, Capital One and Citi have raised the
credit lines of consumer accounts in their bank card trusts well
beyond the rate of inflation, and have separated from their peers
in terms of growth in average credit lines,” the analysts
Credit line reductions
For Capital One, the growth in the
average credit line is not inconsistent with the trust’s increase
in higher credit score accounts and more seasoned balances. Even
after the increase, Capital One’s consumer portfolio maintains a
far lower average credit line than its peers.
Citi’s average credit lines are also on the
rise while aggregate credit lines have dropped substantially.
Again, a closer look at the proportion of zero-balance accounts may
offer an explanation. Indeed, since late 2007, Citi has decreased
the number of zero-balance accounts in its bank card trust by over
one-third, lowering the overall proportion to 48 percent from 57
Although American Express has reduced overall
consumer credit lines since last October, over the past four years
credit lines on active accounts have risen. The proportion of
credit card accounts in Amex’s trust with credit lines in excess of
$25,000 grew to more than 20 percent this year from 5 percent in
2005, Moody’s says.
The report highlights one important issuer
reaction to the new federal protections for credit card users. In
advance of the tougher rules, banks have been raising fees and
interest rates, hoping to ensure that one of their historically
most lucrative businesses remains that way.
The moves are helping banks lock in revenue
ahead of the new restrictions under the Credit Card Accountability,
Responsibility and Disclosure (CARD) Act.
Since April, the average variable rate on new
cards has risen steadily to 11.22 percent as of the end of August
from 10.69 percent, according to Bankrate.com, a consumer finance
website. This comes even though the prime rate, the index to which
card rates are generally pegged, has not moved in that period.
Critics of the reforms argued that the new law
would further squeeze consumer spending by leading to reduced
access to credit and higher interest rates for cardholders, thus
hurting an economic recovery.
The Moody’s report refutes that contention, at
least in part, by concluding that for active accounts, credit lines
are actually increasing, but the American consumer might have the
US consumers are saving more and paring down
their debts, a trend that the new law could reinforce. For the
three months that ended 30 June, US households on average carried a
credit card balance of $7,987, down from a high of $8,529 in the
third quarter of last year, according to Moody’s Economy.com.
Although more recent signs suggest that credit
card defaults are stabilising, banks face continued troubles in
this sector, given that card delinquency rates typically rise with
the unemployment rate – which is expected to stay high for the next
couple of years. The new credit card rules add to the already
treacherous climate for card issuers.