Americans Slightly Hungrier for Credit, but Banks Remain Cautious

Americans want more credit cards -- but their appetite isn't very strong, according to research released Monday by the Federal Reserve. Banks are doling out more cards with easier terms -- but the portions remain small.

In its quarterly report from senior loan officers on consumers' demand for credit and banks' willingness to supply it, the Fed found that while demand for auto loans stepped up, "only modest net fractions of banks reported stronger demand for credit card loans and for other consumer loans."

Every quarter, the Federal Reserve polls loan officers across the country and asks them for a three-month snapshot of what lending was like at their bank. Monday's release covers the second quarter of 2012, as seen by loan officers representing 64 domestic banks and 23 U.S. branches of foreign banks.

The summary of their reports shows another example of how slowly the economy is recovering from 2008, when banks slammed the door on consumer credit during the worst of the recession. Since then, both banks and consumers have slowly warmed to each other, and Monday's report showed the temperature up, but by just another degree.

A small number of banks -- 10.9% -- said they made it slightly easier for consumers to qualify for a new credit card. The rest left their credit standards alone.

The good news for consumers is that none of the banks said they made it harder to qualify for credit. However, many of those who have applied for credit recently likely found that the amount of credit they qualified for hasn't changed much.

More than 13% of banks said they observed a moderately stronger demand for credit in the third quarter of 2012; almost all the rest said that the volume of demand is about the same.

Modest change

Despite the slight uptick in demand, most banks say that gaining access to credit hasn't changed much at all from the previous quarter. For example:

Just 11.6% of banks said they increased consumers' credit limits in the second quarter of 2012, while 7% said they cut them somewhat. Meanwhile, more than 79% of banks said that they kept their credit limit standards the same.
Most banks also reported leaving consumers' credit card interest rates alone. One respondent said his bank raised consumers' APRs somewhat, while another reported lowering them.
Two banks said the minimum amount due on a credit card was raised somewhat, while one bank said it lowered it considerably. However, most banks -- 93% -- left that part of a consumer's bill alone.
A slightly larger number of banks -- 7% -- said that they lowered the minimum required credit score to qualify for a credit card, and none of the banks said they raised it. However, 93% said they left that critical threshold the same.
Similarly, most banks remained reluctant to change their existing policies for consumers who don't meet the minimum required credit score for a card. Almost all (97.7%) of banks said they did not increase or decrease the number of loans extended to consumers who didn't meet their credit score requirements. Just one bank said it relaxed its standards somewhat.

Lenders cautious, but still hungry, say experts

The Fed survey isn't the only report to show that banks are reluctant to take bigger risks on consumers. Researchers outside the Fed have also found other indications that credit card issuers remain guarded. For example, the number of credit card mailings sent to U.S. households is down significantly compared to the same time last year, according to new research from Mintel Comperemedia.

Issuers sent slightly more offers to U.S. consumers in the second quarter of 2012 than in the first quarter -- 831 million offers in the third quarter compared to 819 million in the first, according to Mintel research.

However, during the same period in 2011, the number of offers that consumers received in the second quarter hit 1,301 million, says Andrew Davidson, senior vice president at Mintel Comperemedia.

"In 2012, card issuers have adopted a more cautious approach due to an uncertain economic environment," wrote Davidson in an email. "Citi and Chase who dominated the mailbox last year have cut back significantly along with issuers such as Bank of America and American Express."

Despite the fewer offers, however, experts don't believe that the smaller volume of credit card mailings means lenders are less eager to court new customers. "I don't think they're pulling back," says the Tower Group's Dennis Moroney. "I think they're trying to figure out the best channel" to reach consumers. Credit card mailings are expensive, he says, and issuers are responding by becoming more targeted with the offers they send.

Moshe Orenbuch, a managing director at the financial services firm Credit Suisse, cites J.P Morgan Chase as an example of banks' different approach to reaching new consumers. Chase cut back its number of credit card mailings the most of any issuer. However, the issuer is "still marketing in a meaningful way," he says. "They said earlier this year ... that they expected to spend a comparable amount on marketing, just less on mail," added Orenbuch in an email.

Experts expect that higher volumes of credit card mailings will likely return later on. "The latest downturn likely reflects a pause in activity rather than signifying a permanent reduction in direct mail," said Mintel Comperemedia's Andrew Davidson. "A tough competitive environment and continued innovation within the credit card space suggest the decline may only be a temporary hiatus rather than a longer term trend, as card issuers seek ways to stand out from competitors."

It's also likely that issuers will pick up their activity once the economy improves, he added. "Credit card direct mail is cyclical, with volume trends reflecting the peaks and troughs of the Dow as a barometer for the health of the U.S. economy," explains Davidson. "Once the long-term outlook for the economy gains more solid footing, confidence -- and direct mail volumes -- will return."