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CFPB report opens window on card approvals, credit limits

Fred Williams

What are the odds of getting a credit card if your credit score isn’t so hot?  And what about the size of your credit limit?

The federal government’s consumer financial watchdog unpacked some big data in a report out today, answering those questions and several others.
The report, which coincides with a field hearing in Chicago about credit cards, is a follow-up to the CARD Act of 2009. It looks at how the law’s protections against surprise fees and interest rate hikes are working. They’re working:  the average late fee is down $6 and over-limit fees are almost extinct.

Beyond that, the report — based on a look at 85 percent to 90 percent of credit card balances — shines a statistical spotlight on the credit card arena. It looks at the changes over the past four years — during which the economy was wrenched by the 2009 recession more than anything Congress did.

Here’s a rundown of some key findings for general purpose cards:

•    Approval rates. If you’re in the superprime group, with a FICO score above 720, approval rates were 85.5 percent at the end of 2012. That’s down from 92 percent in 2007. Subprime applicants (sub-licants?), with FICO scores below 660, had approval rates of 17.1 percent in 2012, compared to 23 percent in 2007.

•    Interest rates.  Rates charged on consumers’ balances were 12.9 percent on average at the end of 2012. Rates ranged from 10.2 percent for superprime borrowers up to 16.7 percent for deep-subprimes, whose FICO scores are below 620. The spread has grown since 2008, showing that cards are doing a better job of covering their costs through upfront pricing instead of hidden fees.

•    Credit limits. The average size of new credit lines granted at the end of 2012 was $7,854 for superprimes, $3,448 for primes (FICO  score 660 to 719), $1,275 for core subprime (FICO 620-659) and $598 for deep subprimes (below 620.)

•    Credit limit increases. Overall, the frequency of credit limit increases has plunged — only 2 percent of accounts saw a quarterly increase at the end of 2012, compared with 5.7 percent of accounts in the second quarter of 2008.

The CARD Act is likely holding back increases in credit limits, the report says. The law requires banks to consider an applicant’s ability to repay before granting credit, meaning banks now need to take a look at your income, not just your repayment record, when raising your limit. The CFPB said it is taking a look at how this is affecting consumers.  Although banks can use estimates of your income, rather than a hard number, they might need more guidance about how to make estimates that will pass muster with examiners.

The report also said there are gaps in the CARD Act’s consumer protections.  CFPB Director Richard Cordray said the agency is looking at four areas of concern, and the report shed some new light on card pitfalls.

Take deferred interest financing, for example. Retailers use these deals to help sell big-ticket items, promising zero interest for six months or longer — provided you pay off the item by the end of the term. The report found that many consumers are getting hit with retroactive interest — and the bills are being handed most often to subprime borrowers, who can least afford them. Overall, 80 percent of borrowers manage to meet the terms of the complex deals and avoid finance charges. But among borrowers with FICO scores below 620, the payoff rate was only 57 percent, meaning 43 of every 100 get hit with retroactive interest.

“We will be examining the risks and benefits of such products,” Cordray said in remarks at the hearing, “and will take action if it appears to be justified.”

Oh, and about all those numbers that the consumer bureau is crunching? Cordray added a footnote on that topic, following charges by critics that the consumer bureau is snooping on credit card purchases.

“We never receive a cardholder’s name or other direct or unique identifiers,” he said, “we never receive information describing the specific transactions on any account, and we do not monitor any individual’s financial transactions.”

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