With consumer spending and earnings steadily rising in the third quarter, the U.S. economy still appears to be performing well. But while some lenders are seeking to loosen borrowing standards in the current climate, others are looking to tighten up.
According to a report in The Wall Street Journal published Monday, two of the largest credit card issuers, Discover and Capital One, said they’ve begun to introduce credit limit restrictions for some new and existing customers.
Why the caution? Both issuers said in the report that there’s no indication consumers are any less able to pay off debt at this point, but there is concern about how long they can keep it up.
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What does this mean?
In the years since the Great Recession, many banks and lenders have been focusing their business on consumers with better-than-average credit scores because doing business with them meant less risk.
Now that the economy seems solid, some lenders are looking for opportunities to grow their businesses beyond prime lending, but others — Capital One and Discover — seem more wary, making moves to pull back on lending instead.
On the company’s earnings call, Capital One CEO Richard Fairbank said that the company had been more cautious about the spending limits it approves for newly issued cards and raising credit limits for existing customers’ accounts.
Discover said it had reduced how many balance transfer offers it made to a certain higher risk group. Discover also has spent the last two years shutting down a number of inactive cards that totaled more than $30 billion in spending limits. Both these actions were part of an effort to discourage customers from maxing out their credit cards, according to the paper.
Some reasons the two issuers might be moving in a more cautious direction: American consumer debt is on the rise — and the Federal Reserve continues to raise interest rates, directly affecting things like credit card APRs. But it also comes down to a general apprehension about the economy and how long its current growth can continue.
As reported by the Journal, Discover CEO Roger Hochschild said, “It really is about reducing risk. By traditional measures we’re pretty late into an economic cycle.”
Fairbank’s thoughts on the current economy? “[I]n some ways, it almost feels too good to be true,” he said in the report.
How will this affect you?
If you’re thinking about applying for a credit card from either Discover or Capital One, you may want to lower your spending limit expectations — especially if your credit scores are lower than average.
If you already have a Discover or Capital One credit card and you want to ask for a credit increase, feel free — but you should realize that you might now be less likely to get approved for the amount you want.
The Journal also reported that Discover said it had cut back on its personal loan approvals, so the company may not be your best bet for those offerings.
What can you do?
Having a lower spending limit on a credit card isn’t necessarily a bad thing. If you apply for a card and are approved for a limit that’s less than you had hoped for, it might force you to pay more attention to the way you use your credit cards.
Set a budget and monitor your spending — remember, it’s good practice to keep your balances on all your credit cards at or below 30% of your overall credit limit. If you diligently track your purchases, getting a lower limit could actually help you use your card more responsibly.
You should also keep an eye on whether other credit card issuers decide to follow Discover’s and Capital One’s lead. As these two lenders noted, the economy is still strong, and they haven’t seen any signs that consumers are less likely to be able to pay down their debt. But other lenders might ultimately decide to take similar measures to protect themselves against potential losses.