“Proactive credit line increases” (PCLIs) are when your credit card company increases your credit limit without your asking for it; it was very common prior to the 2008 crisis, but the post-crisis rules largely put a stop to it. Now, banks have figured out regulatory loopholes that allow them to throw PCLIs at their most vulnerable customers, leading to record-high national levels of credit-card debt of $880b as of last September, higher than the pre-crisis high.
Credit cards are the most profitable loans that the finance industry originates, and 2019 was the best-ever year for the banks’ profits from credit cards, with interest rates soaring to a 20-year peak. The US banks made $179b in credit card fees and interest in 2019, and 2020 is projected to be even better. Credit-card debt is the fastest-growing form of debt in the USA.
Much of this PCLI activity is subprime — extending credit to people who are already overburdened by debt and who will likely miss payments, leading to high penalties, which are extremely profitable for banks.
The number of people aged 19-29 in the USA who are more than 90 days late on their card payments just reached a ten-year high.
But after the stock slipped in 2017, [Capital One] executives came under pressure to show they could meet growth targets. They eventually tweaked their models to offer increases to more customers, betting on a quirk in human behavior, according to the person with knowledge of the decision, who asked not to be named discussing the talks. The firm’sanalyses showed people tended to keep their card utilization steady, even after line increases. In other words, someone who used 80% of their credit line before the boost, would typically use the same percentage afterward, generating more revenue.Other researchers had come to similar conclusions. For consumers who carry balances on their cards, “nearly 100% of an increase in credit limits eventually becomes an increase in debts,” according to a working paper by Scott Fulford and Scott Schuh for the Federal Reserve Bank of Boston. About half of U.S. credit card accounts carry a balance each month, the CFPB said.
Banks Are Handing Out Beefed-Up Credit Lines No One Asked For [Michelle Davis/Bloomberg]
(via Naked Capitalism)