Banks Slashed $99 Billion in Credit Limits During the Pandemic
As the Covid-19 virus was spreading around the world, it had a huge effect on the economy and spending patterns. Although we started seeing the economy rebound in the last quarter, GDP was 2.5% smaller at the end of the 2020 than when it began.
During this time we also saw a trend emerging for credit card issuers. Although they rarely acknowledged it, banks started cutting credit limits by hundreds or thousands of dollars as the Covid-19 pandemic spread. We wrote about Chase and Capital One doing it, and by June, over 70 million cardholders had been affected.
Now Bloomberg has the numbers that show how far the practice went. It reports that the 14 lenders that dominate U.S. credit cards slashed $99 billion from their customers’ spending limits in 2020, mostly affecting financially troubled households. That makes even more problematic since these are people who usually lean on cards for emergencies.
Capital One led the way, cutting $30 billion from limits by the end of 2020. Larger rivals Citigroup Inc. and JPMorgan Chase & Co. each saw their totals fall by $19 billion. But of these actions are taken without actually knowing much about the cardholder.
U.S. credit-card issuers don’t really know who lost their job or income since they opened accounts. So banks to make assumptions based on other factors about who are the riskiest customers. To avoid that risk, some banks closed dormant accounts or lowered their customers’ limits to whatever level they regularly use. Many reports on social media showed credit limits cut by as much as 90% in some cases, and sometimes right after the cardholder would make a payment to the card.
As expected, people with lower credit scores were most affected by these actions. TransUnion estimates that borrowers with subprime and near prime credit scores saw their limits reduced by a combined $110 billion. However, credit-card issuers expanded lines for customer with super prime scores by an estimated $81 billion.