The report last Friday from the Federal Reserve that August credit card spending saw a strong rise may bear out the recent findings of Dennis Moroney, a senior research analyst who covers bank cards for the TowerGroup in Needham, Mass. Moroney reported in September that consumers will be using their credit cards for more of their spending because banks have tightened requirements for granting home equity loans.
The decline in house values in certain regions has limited the amount of credit available through a HELOC loan, while the rise in interest rates has sent rates on the loans higher, writes Moroney in “Subprime Mortgage Meltdown: Upside for the Credit Card Business?”The collapse of the subprime mortgage market also tightened credit availability.
Meanwhile, banks are making it easier for consumers to get a credit card. Moroney studied the Fed’s quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices that includes responses from 60 large domestic banks and 24 U.S. branches and agencies of foreign banks.
“The data indicates that banks have tightened standards for non-credit card loans but have loosened standards for credit cards. (An example of loosening approval standards is the lowering of Fair Isaac Corporation FICO scores or income cut-off for approvals.) Historically, credit standards for credit card and non-credit card loans have trended together,” writes Moroney.
The numbers shifted dramatically away from each other in the second quarter with standards for non-card loans rising to rates last seen prior to 2001. Standards for card loans declined to rates last seen in the second quarter of 2003.
Moroney writes that looser standards will result in higher credit card balances and delinquencies. That will bring business opportunities to debt buyers, collection agencies, vendors such as calling centers, and the technology firms that serve these companies. Firms offering credit risk services will also see greater opportunities, according to Moroney.
The Federal Reserve reported that total U.S. consumer credit in August expanded by $12.2 billion, or a 5.9 percent annual rate ("Credit Card Spending Soars in August," 10/9). The Fed said revolving credit, made up primarily of credit card debt, rose 8.1 percent, or $6.1 billion, in August.
The Fed also upwardly revised credit card spending in July to 7.4 percent from the 6.6 percent it reported last month. Card spending in June increased at a 6.4 percent rate and by a 10.9 percent clip in May. TowerGroup reports that current credit card debt exceeds $880 billion.