By Andrea Leptinsky
Consumers are getting far fewer credit cards than a year fago and most of the new approvals are going to those with better credit scores, according to new statistics released by credit bureau Equifax.
Fifty-four percent fewer new credit card accounts were opened in July 2009 than the previous July, Equifax reports in its September 2009 Credit Trends Report, released Oct. 13. More than half of those new accounts went to consumers with an Equifax Risk Score higher than 740. That's nearly double the percentage from July 2007. During that same period, the percentage of new cards issued to consumers with credit scores lower than 660 dropped by almost half, to just over 22 percent. (The Equifax Risk Score can range from 280 to 850, similar to the better-known FICO score's range of 300 to 850.)
The credit bureau's report offers further proof that a move to become stricter with card approvals, initiated when the recession began in 2007, is still under way. The challenges facing the credit industry -- including the onset of the economic recession and the enactment of sweeping pro-consumer reforms -- have forced issuers to re-evaluate their business practices.
"We have taken a number of actions to maintain our credit quality," says Mai Lee, spokeswoman for Discover Financial Services. "These actions include ... suppressing credit line increases on high-risk accounts and investing in proactive risk management and operational practices." Discover is also eliminating some long-term inactive accounts in order to reduce its contingent loan exposure, Lee said. Other major issuers have made similar moves, including increasing APRs and changing cards from having a fixed interest rate to a variable rate.
Taking things too far?
Some are concerned, however, that issuers' moves are becoming too extreme. Testifying before the Senate's Subcommittee on Financial Institutions on Oct. 14, Federal Reserve Gov. Daniel K. Tarullo cautioned issuers against taking things too far and becoming too controlling in their tactics for assessing borrowers' ability to pay.
"The Federal Reserve has directed examiners to be mindful of the effects of excessive credit tightening in the broader economy," he said. "We are aware that bankers may become overconservative in an attempt to ameliorate past weaknesses in lending practices, and are working to emphasize that it is in all parties' best interests to continue making loans to creditworthy borrowers."
Although issuers are being more mindful of who they offer cards to, consumers are also saving at a higher rate, paying off more of their debt -- and eliminating their own unnecessary lines of credit before issuers have a chance to do it for them. The result of belt-tightening by consumers and issuers: The number of credit accounts active in the United States has dropped by 88 million since September 2008 and credit lines have been reduced by $751 billion, according to Equifax.
"The data reflect an economy in transition with consumers doing better with their financial management, but with many still struggling in the face of high unemployment and restricted credit," says Dann Adams, president of Equifax's U.S. Consumer Information System, in a statement. "Consumers are conserving cash and reducing debt across the board. We haven't seen savings rates this high since shortly after the third quarter of 2001 -- just after 9/11."
