Economy

Tough Times in Consumer Credit Could Push Some Americans to Nontraditional Lenders

April wasn’t a good month for consumer-credit use. According to the latest Federal Reserve data, U.S. consumer borrowing dropped 19.6 percent — its fastest decline since 1943.

All in, consumer credit took a $68.8 billion hit in April, with revolving debts like credit cards taking the hardest hit — falling by a steep 64.9 percent. Non-revolving credit —  including student loans and auto loans — fell as well, but only by 4 percent. (The Fed figures don’t include mortgage debt.)

April’s falling debt figures corresponded with other reports showing that U.S. consumer savings are picking up and consumer spending is falling. That might indicate admirable belt-tightening among Americans, but consumers are also utilizing less credit because credit is becoming increasingly hard to come by.

In some cases, credit-card holders increasingly complain about banks slashing their credit limits or canceling their cards involuntarily. Prospective customers also say access to credit is becoming difficult in the first place as banks tighten lending standards.

“We had a sense that banks had already begun to change their offers,” Matt Schulz chief industry analyst at CompareCards, told CNN. “But we didn’t think that it was happening this quickly to this many people.”

The cutbacks and closures often hit consumers by surprise, since card issuers aren’t generally required to notify customers of such changes in advance, according to Schulz. Unfortunately, the cutbacks come as consumers hit hard by coronavirus-related furloughs and layoffs might have been counting on credit cards to smooth over extended breaks between their paychecks.

Beverly Anderson, president of global consumer services at Equifax, said it’s common in economic downturns for lenders to minimize risk. “When you have more than 30 million people apply for unemployment, banks don’t know who is risky and who is not,” she said. “All that available credit now looks like a great amount of risk.”

Unfortunately, risk is increasingly difficult for banks to meaningfully parse, as pandemic-related layoffs and business closures have hit consumers of all income levels. Anderson said white-collar workers earning north of $100,000 per year are seeing their credit-card limits dramatically cut, something she hadn’t seen in previous downturns.

However, consumers with healthy income streams often have a much greater ability to withstand fluctuations in their credit lines. First, they’re often more likely to have cash and other liquid capital at their disposal and don’t tend to rely on credit cards as an income-smoothing tool.

Second, they have on average much higher credit lines to begin with. According to the New York Federal Reserve, credit-card users in the wealthiest ZIP codes average roughly $14,000 of available credit to draw on. By contrast, those in areas where annual incomes clock in under $45,000 tend to average about $1,900.

Banks have been open about boosting their credit requirements. For example, Chase announced recently that it’s temporarily tightening credit standards across the board. A spokesperson said the plan includes “in some cases either pausing new applications or focusing on established customers only.”

And according to published reports, banks are being more restrictive in more places than has been the historical norm. For instance, homeowners looking to tap into home equity as an alternative to credit cards had historically turned to home equity lines of credit (or “HELOCs”), but banks like Chase and Wells Fargo are tightening those as well.

In fact, Wells Fargo recently stopped issuing HELOCs altogether. “The decision to temporarily suspend the origination of new HELOCs reflects careful consideration of current market conditions and the uncertainty around the timing and scope of the anticipated economic recovery,” a Wells Fargo spokesperson said.

Of course, refinancing a mortgage requires having a mortgage already — something that only some 37 percent of millennials have managed to achieve. This raises an interesting question — given that credit is being crunched, will millennials find themselves further alienated from the traditional credit-card industry?

“We’ve seen COVID-19 accelerating a theme that’s been in place now for 10 years or so, which is a move away from traditional credit among younger consumers because they think it’s not good for them,” Afterpay CEO and Co-founder Anthony Eisen told Karen Webster in a recent discussion.

Will those consumers start drifting even farther out of the reach of traditional credit cards and more firmly into the arms of alternative providers like Afterpay? Time will tell, but it seems possible that consumers’ declining credit use is setting things up for a major sea change in who’ll be able to access traditional credit sources — and who’ll even choose to do so going forward.

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