Capital One Cuts Borrowing Limits On Credit Cards As Industry Tightens During Pandemic

Capital One Financial Corp. (COF) said it will cut borrowing limits on its credit cards as stimulus measures for millions of unemployed Americans expire – raising fears for people who may need funds for an emergency.

Meanwhile, the White House and Congressional Democrats remain in a stalemate about extending enhanced unemployment benefits of $600 per week.

“Capital One periodically reviews accounts based on a variety of factors and may make changes to existing credit lines,” the company stated.

Capital One is the third-largest U.S. credit card lender, after JPMorgan Chase & Co. (JPM) and Citigroup Inc. (C).

Ted Rossman, industry analyst at CreditCards.com, told International Business Times that cutting borrowing limits is “a common tactic” when unemployment becomes an issue.

“Most card companies are doing it because they’re worried about risk,” he said. “The main thing consumers need to know is that a credit limit cut can raise their credit utilization ratio and hurt their credit score.”

Rossman cited that the Federal Reserve’s most recent Senior Loan Officer Survey found that 60% of banks tightened credit limits in the preceding three months.

“We saw the same thing during the Great Recession, when the Fed found 20% of banks cut limits on prime customers and 60% did so on subprime cardholders,” Rossman added.

A decline in unemployment benefits raises the risks of credit card holders maxing out their accounts as they seek funds to pay for ordinary expenses or emergencies.

Sara Rathner, credit cards expert at NerdWallet, told IB Times that it comes as no surprise that a major credit card issuer like Capital One is cutting borrowing limits right now.

“We’re months into a tough economic situation for workers and small businesses, whose bottom lines have been affected by the pandemic,” she said. “Capital One is lowering the risk to themselves by essentially lending less money to cardholders.”

The overall unemployment rate has been declining, but about 14.5 million people are still receiving ongoing unemployment assistance from regular state programs.

One million Americans filed for unemployment compensation last week, down 98,000 from the week before. The Bureau of Labor Statistics estimated the unemployment rate for the week that ended Aug. 15 at about 9.9%.

But credit card lenders have complained that they can’t adequately assess risk since they don’t know how many of their borrowers have lost their jobs.

“I don’t think we have a rigorous measure of how many of our current borrowers are unemployed,” Capital One Chief Executive Officer Richard Fairbank said last month. “There are a lot of people that are in different degrees of unemployment right now.”

Rathner said for consumers a lowered credit limit means a hit to one’s financial situation now and in the longer term.

“Many Americans are struggling to make ends meet, especially if their emergency savings accounts are dwindling,” she said. “Your credit limit can serve as a backup emergency fund, and a lower limit means a smaller safety net.”

However, despite the pandemic, cardholders have generally been able to keep up with payments on their credit card accounts. Still credit card lenders have been lowering account limits across the board.

TransUnion, a credit reporting firm, said that total credit on new credit card accounts fell by 8.3% to $78 billion in the second quarter from a year ago, the first such decline in more than two years.

In addition, the average credit line issued for new accounts dropped by 9% to $5,257.

“The major [credit card] lenders have undergone an evaluation of their lending standards – or who they’ll approve – and secondly how much credit they’ll approve,” Paul Siegfried, senior vice president and credit card business leader at TransUnion, told Bloomberg. “For consumers receiving new credit, they’re seeing lower [credit] lines.”

According to TransUnion, the percentage of credit card accounts in serious delinquency – more than 60 days past due – slipped to 1.37% in July from 1.48% in June. (Interestingly, this figure was at 1.61% in July 2019, well before the pandemic).

Credit card consumers are also paying down their card balances, with the average debt per user dropping from $5,645 in the second quarter of 2019 to $5,236 in the second quarter of 2020.

“Overall the consumer credit market has been performing quite well despite the obvious challenges brought on by the COVID-19 pandemic,” said Matt Komos, vice president of research and consulting at TransUnion.