The State of Credit, April 2009
A quick roundup of current lending news.
In December 2008 we reported a prediction that credit card issuers would be reducing available credit by about 45%, and recently the company behind the FICO score released a report of credit lines being reduced from April to October 2008, right before that prediction was made.
From the study, we find that lenders reduced credit for 16% of consumers, and 31% of those affected had a late payment, collections account or public record (e.g. bankruptcy, foreclosure, garnishment or tax lien). Disturbingly, the median FICO score of those affected was 770, a very good score. So, while a smallish minority of Americans were affected, they were the best customers of the bunch: good scores with few red flags.
The better news is that the average credit line was reduced only 5%, so all other things being equal, the FICO score of someone in this group shouldn’t have been negatively affected. We’ll have to wait and see, of course, what happens to FICO scores after October 2008.
Deceptive Credit Card Practices Update
We haven’t written about this since inauguration day, but it looks like there may be movement again soon on a bill promoting the credit card holder’s bill of rights.
Lawrence Summers, a White House economic adviser said on “Meet the Press” this past weekend that the president will be “very focused in the very near term on a whole set of issues having to do with credit card abuses.“
It’s also possible that instead of passing a new law, credit card issuers may make a whole set of promises during a meeting with the president and his team on Thursday.
Then there’s the issue that banks aren’t lending what they are supposed to be. From Reuters:
Credit card issuers have received over $120 billion in taxpayer funds since October, money the government has asked them to use to expand lending.
But with U.S. credit card defaults at record highs, lenders are trying to protect themselves by tightening credit limits and closing accounts, actions that have infuriated lawmakers, consumers, and even triggered a New York state attorney general inquiry.
Bailouts Not Working?
Put too simply: taxpayers loaned billions and billions of dollars to banks who had stopped lending money to those same taxpayers, in order to get them lending again. Overall, this doesn’t seem to be working when we see headlines like “Bank Lending Keeps Dropping” and “U.S. Banks Line Up to Repay TARP Money“.
Commercial and industrial lending were down in February, but I was glad to see that Home Loan Refinancing was up 42% from January to February. Home equity lines of credit were also being processed at levels typical for the season.
Similarly, Americans feel like this is a good time to buy a house. In fact, 71% of people responded that way, the highest level in four years.
Article comments
Here is my personal example:
My FICO score was 751 when:
Amex credit limit was slashed from 8,000 to 6,000 & I have a 5,000 balance.
Bank of America credit limit was slashed from 12,700 to 6,500 & I have a 0 balance.
Chase credit limit stayed the same at 7,500 & I have a 0 balance.
I’m currently looking for a house and this news will greatly reduce my score because now instead of my ratio being 18% (5,000 balance/28,200 limit), it will be 25%. NOT HAPPY!
Very prudent write-up and relevant to continually keep an eye on. We’ve been very interested in this whole situation and have actually postulated that such a decrease in available credit (thus hurting your utilization ratio) could really put a negative hit on FICOs. In particular, we’ve focused on FICOs that are in the fair/poor category, especially those teetering on the edge of falling to the sub-prime level. If we essentially push a bunch of new consumers down to sub-prime, their future access to credit becomes impaired, hindering both their liquidity and personal balance sheet.
Add in the fact that many lenders are outright closing accounts as well (affecting the history portion of FICO calculation), and you could have a big mess of dings on many consumers FICO scores. We’ve seen all these institutions be downgraded and have poor balance sheets/credit ratings. Essentially, you now have a ‘downgrade’ of the american consumer’s credit rating. We elaborated on the whole issue in depth here: http://www.marketfolly.com/2009/03/downgrading-american-consumers-credit.html
In the post, is “October 2008” supposed to be “October 2009?”
Working in a government bank myself, I can sort of understand what the banks are dealing with. On the one hand you have the customers, whom the populace wishes to serve, but on the other you have investors, who want at least all their money back, if not a good return on their investment. If the banks lend out more money, they’ll make one group happy, but they’ll no doubt end up in a similar trouble they were in before. If they cut down on lending and focus on good customers, they will make better/safer returns and make the investors happy, but will make the populace angry. I deal with that in my government organization, where we use money from bonds we sell to investors to fund low-interest mortgage loans to low income families. We can make either the investors happy, or the politicians/populace happy, but oftentimes it’s difficult to make both happy.
Hrm…. does it bother anyone else how dependent on credit life is? Isn’t it the loaner’s rights to only loan money profitably?
I could easily operate w/o credit (might be a slight hassle switching things over…) But then again I don’t have a mortgage or house or what not.
I find it very intriguing that the median FICO score of those affected by the credit limit decreases was 770. Perhaps, even more interesting was that the FICO score only decreased by 5% with such a significant decrease in credit availability. Still, I guess if someone is on the low end of good credit (i.e. 720), a 5% decrease could bump him or her down to average credit.
I think it was “credit limit” that was decreased by 5%, not the FICO score.
This is a neat concept and something you should do more often. I enjoy having all these thinks all in one place!
My credit card company just sent me some mail saying my credit limit has been increased. Not that I’ve ever even used a tenth of my available credit, but in these bad times I do take that as a good sign. This was a well written summary, and I like the premise: “state of credit.”
Thanks for the update and the compliment!