The average American has about three credit cards, but those looking to add another option to their wallet may find it more difficult to get approved during the current coronavirus pandemic.
During economic downturns, it's common for banks and financial companies to limit their risk by putting more restrictions on who they extend credit to. It's something potential customers are learning first-hand.
For one Wisconsin man, who asked to remain anonymous to avoid any repercussions on future credit card applications, getting new cards is all about maximizing the potential cash-back rewards. He already has half a dozen cash-back credit cards, including the American Express Blue Cash Preferred and the Capital One SavorOne. "All the new cards I've gotten in the past 18 months without a problem," he tells CNBC Make It.
But in late March, the 54-year-old software developer got his first rejections for the U.S. Bank Cash+ card and the Bank of America Cash Rewards card. And while credit card companies reject applicants based on a variety of factors, he believes that his rejections are a result of the recent coronavirus-related economic downturn, considering he's still employed, has good credit and keeps his utilization rate between 5% to 9%. "The party's over," he says. "Everyone's getting tighter."
Bank of America declined to comment for this article, but U.S. Bank said it "continually monitors economic conditions as we work to maintain the integrity of our credit quality across all our products, which is a requirement of all banks," the company said in a statement to CNBC Make It.
U.S. Bank is not the only financial institution re-evaluating things. Discover also adopted a "significantly more cautious view" and has reduced its marketing efforts to attract new customers, CEO Roger Hochschild said during an earnings call on March 31. "Actions we have taken since the crisis began include significant tightening of underwriting for new card and personal loan accounts with additional employment verification. And we've pulled back on balance transfer offers and [credit] line increases."
Capital One's CEO Richard Fairbank outlined similar plans during an April 23 earnings call. "We're making choices that are right out of our playbook in downturns — and certainly, I think, make a lot of sense in this downturn — tightening our extension of new credit to avoid the heightened risk of adverse selection."
Citi said that it has made certain "prudent adjustments" to the company's credit card risk approach in response to economic indicators attributable to Covid-19. "These include scaling back on initiatives such as balance transfer marketing offers and tightening credit standards in select acquisition channels," the bank said in a statement to CNBC Make It.
American Express has not publicly announced any plans to recalibrate its credit card eligibility requirements. That said, Jeffrey Campbell, the company's CFO, said during the latest earnings call that Amex has "taken many steps in the last couple of years to tighten up our risk management practices."
"While our approach and strategies are evolving, our commitment to serving the needs our customers is unwavering," an Amex spokesperson tells CNBC Make It. She added that Amex wants to "manage risk in a responsible way, so the decisions we provide card members are based on our real-time evaluation of their current financial health. We will continue to take appropriate actions and manage credit responsibly."
It's not unusual to see credit card companies taking these steps during periods of economic uncertainty, says Gannesh Bharadhwaj, general manager of credit cards at Credit Karma. "We know that an uncertain job market impacts credit card issuers' underwriting," he says. "There are a lot of unknowns right now and, with unemployment fluctuating so much, issuers are finding it difficult to assess risk and are tightening their lending as a result."
The St. Louis Federal Reserve finds that 39% of domestic banks say they are tightening credit standards on consumer loans and credit cards as of the second quarter, according to a survey the Federal Reserve conducts among 80 large domestic banks and 24 U.S. branches of foreign banks. The U.S. hasn't seen that level of tightening since 2009.
During the 2008 financial crisis, the American Bankers Association found that some credit card issuers scaled back consumer credit lines by more than 50%. In 2015, the Consumer Financial Protection Bureau similarly reported that with the onset of the last financial recession, consumers had less access to credit of all kinds, including loans and credit cards.
Americans will see this play out in several ways. Those applying for a new credit card right now may get rejected more often. For existing cardholders, card companies may lower available credit limits for risky customers to limit likelihood of unpaid balances that issuers may have to eventually write off. Yet existing customers in good standing may see their credit limits stay the same or even increase, Bharadhwaj says, so card companies can offset customers who have become delinquent or have ballooning balances.
Americans may also encounter more hurdles when they apply. A 26-year-old Minnesota man, who asked to be anonymous to protect his privacy, applied for Chase Sapphire Preferred in mid-April, but wasn't approved on the spot, despite having a 755 FICO score through Experian. When he called about it, he was asked to supply a copy of his Social Security card and a copy of a bill for proof of physical address.
"I'm not a credit analyst, so I don't know what's normal procedure and whatnot," he tells CNBC Make It. He submitted the requested documents and was told he'd hear back in seven to 10 days. In the interim, he's crossing his fingers. Chase did not immediately respond for comment.
"It's more than likely I'll be denied, but that won't be a surprise due to the current state of the economy. Now looking back, it was probably a mistake applying for a credit card right now," he says. He applied for a card because he wanted to purchase a new computer to allow him to create video content on YouTube or Twitch as a side gig. He was looking to buy one priced between $2,500 and $3,000.
"I thought if I got a decent credit card, I could afford a PC in that price range and then pay the balance off within the next few months," he says.
Requests for more documentation are not uncommon, even before the pandemic, Bharadhwaj says. "Documentation requirements have always varied by credit card issuer," he says. But they could become more common as a way for credit card companies to seek out more information on a consumer's situation before issuing a card.
"Because credit bureaus do not score on income, not knowing whether a consumer has cash flow is a blind spot for issuers," Bharadhwaj says. For that reason, some customers may see some credit card companies requesting additional documentation to help validate an applicant's identity or to qualify them for a certain credit limit or product offering.
When it comes to who will be affected the most, Bharadhwaj expects subprime (those with credit scores of 580-619) and near-prime (credit scores of 620-659) borrowers will take the biggest hits. And yet these are arguably the people who need help — and access to cash — the most.
"We have seen some banks being more selective in which products to offer or approve, based on risk profiles of consumers and also product constructs," Bharadhwaj says. Those with good credit scores will have less trouble getting approved, but they may still be impacted to some degree because of the lack of visibility into unemployment and the impact the pandemic is having on the economy, he adds.
And this restricted access to credit may linger. "It's tough to say [when these restrictions will ease] given we don't know exactly when shelter in place will end," Bharadhwaj says. But when the U.S. does eventually come out of this current economic downturn, Bharadhwaj believes we'll see a reemergence of people starting to rebuild their finances and increased approval rates.
In fact, both men are both already planning to re-apply when the upheaval from the pandemic calms down. "I'm still gonna go for the Cash+, but I'll wait until things settle and get more back to normal," says the software developer. "The banks are jittery right now so I'll probably try again in 6 months when things are better."
Correction: A previous version of this article incorrectly attributed the statement from Citi bank.