Here’s something scary before Halloween. This morning’s WSJ reports on the tightening of credit card lending standards, “an unusual move in a strong economy that may signal longer-term concerns”. You heard it here first, albeit months ago.
- Capital One Financial COF -2.85% and Discover Financial Services DFS -7.92% said last week they have become more cautious in how they’re handling credit limits.
- The two lenders said they don’t currently see signs of deterioration in consumers’ ability to pay their debts but do question how much longer the economic recovery will last.
Smart consumers might want to accelerate their winter holiday purchasing before other issuers follow Capital One and Discover.
- Capital One and Discover are gauges of many Americans’ ability to handle debt. Discover generally doesn’t market to affluent customers, and Capital One has a large number of customers with less-than-pristine credit scores, making both companies a window into a part of the economy that is often the first to show cracks.
- Some 33% of Capital One’s domestic card balances, for example, are owed by subprime borrowers, according to the bank.
First it is credit lines tightening. Next, expect to see the underwriting function become more conservative.
This will slow down account growth, and what you will see in the credit card metrics is rapid deterioration in risk numbers, such as Net Credit Loss. The nominator will decrease and the denominator will increase in this important metric.
- Separately, Discover has shut down inactive credit cards totaling nearly $30 billion in spending limits over the past two years. The effort is in part aimed at lessening the chances that credit cards that have been abandoned in sock drawers or elsewhere will suddenly start being used by cardholders if they become desperate for credit.
Watch for trends in Mercator Advisory Group’s soon-to-be-published 2018 databook. Here is a link to last year’s version where we discuss contingent liability, which is the metric that covers this very subject.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group