By : Kate Fitzgerald, Collections & Credit Risk
Card issuers within the past two years dramatically reduced consumers’ borrowing capacity to reduce the risk of losses during the recession. But new data suggest the bulk of the credit-line cuts came from closing inactive card accounts, not slashing active borrowers’ credit lines, Moody’s Investors Service noted in a report last week.
Credit lines on U.S. consumer cards totaled $1.95 billion at the end of June, down 30.1% from $2.82 billion two years earlier, when credit lines peaked, Moody’s says, citing data from the Federal Reserve Bank of New York. But total consumer credit card outstanding declined only 12.5% over the same period, to $744 billion from $850 billion at the peak, Moody’s says.
The data indicate the majority of issuers’ recession-sparked credit-line reductions were the result of closing inactive accounts and not to cutting off the available credit to active card users, Moody’s analyst Jeffrey Hibbs tells PaymentsSource. “Issuers cut credit lines substantially over the past two years, but a large portion of those cuts were inactive accounts,” he says.
Closing inactive accounts is a prudent method for removing potential risk during a shaky economy, but the amount of risk reduction that results from this strategy is not “as dramatic” as actually cutting active users’ credit lines, Moody’s notes in its report. Such actions also pose little business risk, while cutting active borrowers’ credit limits “is a far trickier proposition” that could lead to reduced card spending and a higher probability of borrower default, Moody’s says.
“Nevertheless, it is the active cardholder that presents the most credit risk and, therefore, card companies will have to strike a balance between business risk and credit risk as they navigate the current credit cycle,” the firm says.
The New York Fed last month reported that 381 million U.S. consumer credit card accounts were open as of the end of June, down 23% from their peak of 495 million at the end of the second quarter of 2008.
“(The Fed’s data) reflect in stark terms what card issuers know all too well - card usage is down, and charge-offs remain high,” Moody’s says in its report.