Saturday, November 3, 2018

First you're the target market, then you're the problem

I'm cynically amused by an apparent pull-back in the granting of easy credit to consumers.

Capital One Financial Corp. and Discover Financial Services said last week they have become more cautious in how they’re handling credit limits. The two lenders said they don’t currently see signs of deterioration in consumers’ ability to pay their debts but do question how much longer the economic recovery will last.

“In so many ways, one can’t help but be struck by…just how good the economy [at] this point is,” Capital One Chief Executive Richard Fairbank said on the company’s earnings call. “And in some ways, it almost feels too good to be true.”

Credit-card limits have long served as an indicator of lenders’ outlook. During the last financial downturn, card issuers slashed credit limits to avoid incurring new losses. Around 2015, many lenders began increasing limits as they courted more balances and interest income.

Capital One and Discover are gauges of many Americans’ ability to handle debt. Discover generally doesn’t market to affluent customers, and Capital One has a large number of customers with less-than-pristine credit scores, making both companies a window into a part of the economy that is often the first to show cracks. Some 33% of Capital One’s domestic card balances, for example, are owed by subprime borrowers, according to the bank.

. . .

Separately, Discover has shut down inactive credit cards totaling nearly $30 billion in spending limits over the past two years. The effort is in part aimed at  lessening the chances that credit cards that have been abandoned in sock drawers or elsewhere will suddenly start being used by cardholders if they become desperate for credit.

Discover also said it expects losses to increase on personal loans, and it has cut back on originations there.

There's more at the link.

These are the same companies who've been plastering their advertising all over TV, urging consumers to take out a credit card with them.  They also bombard individuals with mailed "pre-approved!" cards, whether we want to receive such offers or not.  (Years ago, annoyed by almost daily solicitations I didn't want, I had the credit check agencies put a permanent block on making my name and address available to such marketers.  It's made life much more peaceful.)

We, as consumers, are cash cows to the banks, just as long as we don't really need the credit they're offering.  However, when credit tightens, suddenly our "irresponsible borrowing" is a problem, and needs to be controlled.  Banks, I have news for you:  if you didn't make credit so freely available, there wouldn't be so many "problem borrowers"!

The way the economy's looking right now, I think it's an excellent idea to pay down (and pay off as soon as possible) every short-term credit account you have;  credit cards, revolving credit lines, etc.  In particular, don't use HELOC's for short-term credit needs, because that jeopardizes a long-term asset (your home) for the sake of short-term purchases that often have no long-term value at all.  Miss D.'s and my objective is to pay our credit card bill in full every month, so it doesn't build up a rollover  that costs us interest.  Longer-term credit will be used only for things that we absolutely have to have and can't afford any other way - and we'll buy within our means, rather than overpaying for things we can't afford.  (Right now, that's our home and our recently acquired vehicle, and we're planning to pay off both loans in less than their term).  I know that, if times get tough, that's hard to do;  but I think it's a very worthwhile objective.

Don't trust the banks to be sympathetic when you run into financial trouble, particularly when their over-generous extension of credit is what helped you get into trouble in the first place.



RustyGunner said...

My household bills all go onto a few credit cards which are never used for anything else and the statement balance autopays every month. That way I maintain an up-to-the-moment history of 100% on-time payments at about 15% credit utilization without spending anything unnecessary. Why’s that important? My employer keeps tabs on our credit scores.

Eric Wilner said...

Hm. Maybe I'd better exercise the ol' Discover card soon, just to keep the account alive.
I took out a HELOC about two years ago, and just started using it (in a small way) this fall, for its intended purpose: fixing up the house so's I can finally sell it and "downsize" to that farm in Tennessee that I've been wanting these past few years.
My bank, of course, has been persistently sending me suggestions that I should use the HELOC as ready cash for all manner of fripperies, never mind that the papers I signed said it was for home fixery-uppery. Didn't Admiral Ackbar have something to say about that?

Uncle Lar said...

One of the mortgage companies that caters to US veterans is always promoting a VA loan for 100% of your home's value as a great way to pay off short term debt such as credit card balances.
What they never bother to mention is that when someone finds themselves hopelessly in debt they do have the option of bankruptcy, not a great idea, but the process is there for a reason.
Thing is, in a bankruptcy you will be allowed to keep your home, car, and other things essential for living, but all your credit card debt will be erased. It's intended to provide an orderly new start for those who through no fault of their own have gotten into an irreversible situation. Of course it's been horribly abused by spendthrifts, but the intent was to provide a last ditch recourse for desperate times.
But if you mortgage your home to the hilt and still find yourself in a hole to the extent that you cannot make your payments in a timely fashion the lending institution will foreclose and you'll find yourself on the street.
It is never a good idea to cover short term debt by leveraging a long term asset.

Old NFO said...

Excellent points! And a word to the wise!

Rick T said...

There is an old saying that bankers and stockbrokers buying yachts, not their customers. Or, as Amos and Andy said "he is the broker and you is the broke-ee"

deb harvey said...

deep in debt not good must stop using, now med needs are almost zero should be able to pull out eventually but bankruptcy is an option.
recent widowhood changes the parameters
cannot prepare for unexpected death or disease but if you are not in debt stay that way. you will never regret it.

Steve said...

Dave Ramsey, Dave Ramsey, Dave Ramsey and once again Dave Ramsey.
Follow his home spun, grandparently advice and you won't regret it!