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Credit card issuers increasingly tighten standards, Fed says

Jeremy Simon

If you’ve recently been turned down for a credit card or had your credit limit reduced, based on the results of a quarterly survey, you’re not alone.

The April 2008 survey of senior loan officers, released May 5 by the Federal Reserve, shows a threefold surge in the amount of banks acknowledging tougher credit card approval standards compared with the January survey.

“About 30 percent of domestic banks — up from around 10 percent in the January survey — reported that they had tightened their lending standards on credit card loans over the past three months,” the latest survey says. The January survey had itself shown a doubling in the percentage of banks that tightened credit standards from the October survey — to about 10 percent from about 5 percent in the third quarter.

Percentage of respondents
tightening standards for
consumer loans

Source: Federal Reserve

In the initial three months of this year, some banks decided to minimize the risk posed by consumers with bad credit by making credit cards less available to those with poor credit scores, by lowering credit limits for subprime borrowers and by increasing the minimum credit score required for approval. “Significant net fractions of respondents indicated that they had reduced the extent to which such loans were granted to customers who did not meet credit-scoring thresholds, reduced credit limits on credit card loans, and increased minimum required credit scores,” the survey says.

A number of experts I spoke with in March for a story on bank earnings predicted a tougher approach to credit card lending in the wake of card issuers’ bad earnings results.

Despite the tougher credit card lending standards, consumers increasingly warmed to credit in early 2008. About 20 percent of bankers said they “experienced weaker demand for consumer loans of all types over the previous three months,” according to the survey. That was an improvement over the January result, when about 35 percent reported weaker demand for borrowed money.

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