Credit Binge Could Hit $1 Trillion

By Susan Tompor
Detroit Free Press

WWR Article Summary (tl;dr) Say good-bye to the credit crunch and the Great Recession. Credit card issuers are pushing cashback and 0 percent credit cards, opening up doors for the subprime borrower and offering bigger lines of credit when possible.

Detroit Free Press

Just one trip to the cupcake store, plus a follow-up call to my credit card company, gave me a glimpse into how Americans are moving closer to ringing up $1 trillion in credit card debt and some related forms of debt.

On a whim, I pulled out my credit card to buy six extra cupcakes to add a little variety to the dessert table for my son’s high school graduation party. I had already paid for my order of 50 cookies-and-cream cupcakes weeks earlier, and I was picking up the goodies for the party.

Oddly enough, my credit card was rejected on the spot for a $12 purchase for those extra cupcakes. Sure, my spending was way up after the added expenses during the final weeks of my son’s senior year. But believe me, I was no where near my credit limit. My immediate thought: Someone hacked into my card.

I dug for cash, lugged my cupcakes home and called the credit card issuer. While waiting on the phone to find out what happened, nothing did, the clerk somehow ran into a glitch at the store, the card issuer’s automated system suggested that I update my income for their records.

The recorded voice planted the thought that I could soon qualify for a larger line of available credit. One minute, I need to cough up cash to pay for six cupcakes. Another minute, I’m likely to add hundreds or thousands more dollars onto my credit line.

Say good-bye to the credit crunch and the Great Recession. Credit card issuers are pushing cashback and 0 percent credit cards, opening up doors for the subprime borrower and offering bigger lines of credit when possible.

The number of new credit card accounts has jumped to 80.3 million, up 16.3 percent from a year earlier, according to the American Bankers Association’s latest Credit Card Market Monitor report.

New accounts are being driven, in part, by a 26 percent increase year-over-year in new subprime accounts, which bankers say still remain below prerecession levels, according to the association’s report.

“Card issuers are opening up the credit box a little bit. They are issuing more cards to consumers with lower scores,” said Amy Crews Cutts, senior vice president and chief economist at Equifax.

Based on first-quarter data, 10 percent of the new cards issued went to consumers with credit scores of 583 or lower. The average available line of credit: $626.

Mark Zandi, chief economist for Moody’s Analytics, said the consumer debt load on credit cards and finance loans remains well below all-time highs set before the recession. So he’s not concerned yet about consumers getting in too far over their heads.

“Consumers are borrowing more and lenders are more willing to make loans, but at least so far it has been a prudent increase in debt,” Zandi said.

“It may be something a year from now, but I don’t think card debt is currently a significant problem.”

Zandi noted that despite the stronger recent growth in subprime lending, it is only 10 percent of card debt outstanding. Prior to the recession, it peaked at more than 20 percent.

About $662 billion in credit card debt is outstanding, according to data from Moody’s Analytics and Equifax. That figure includes $593 billion in outstanding balances on bank cards and $68.8 billion on retail cards for specific merchants. Add about $320 billion in consumer finance loans and other consumer credit, and you get closer to a much talked-about $1 trillion figure.

“Credit card issuers have loosened their belts in the past year or two and have been making more offers to people,” said Bill Hardekopf, CEO of LowCards.com. “The industry has rebounded more, and you have seen more offers.”

Some of the deals:

-Cashback cards are increasingly tempting.
Big names have big offers: Citi Double Cash Card offers 1 percent on all purchases and 1 percent when you pay off the bill. Balance transfers do not earn cashback.

Credit card sites, such as Credit.com, have listed a variety of cashback deals. Some deals are offered by BankAmericard Cash Rewards, QuickSilver from Capital One and Chase Freedom Unlimited. Some include bonus cash of $100 or $150 if you spend a set amount in the first few months.

“The cashback cards have gotten really competitive,” Hardekopf said.

-The 0 percent deal is still available.
Greg McBride, chief financial analyst for Bankrate.com, said plenty of 0 percent limited introductory offers are giving consumers a window of opportunity to pay down or pay off debt without the headwind of finance charges.

“We’ll see fewer, and less generous, 0 percent offers over the next year,” McBride said.

The Federal Open Market Committee is expected to raise short-term interest rates a few times in 2016, following the first rate hike last December. The next meetings are June 14-June 15 and July 26-July 27.

But remember, some 0 percent offers will require excellent credit and you might not qualify for the card. You also want to know how high the rate will climb after the limited 0 percent offer expires after a 12-month or 15-month window.

You must pay the minimum payment that’s required on time each month, or risk losing that 0 percent rate before the introductory offer ends.

Pay attention to any fees for balance transfers, if you’re consolidating debt to take advantage of a 0 percent offer. Some issuers may limit the dollar amount of a balance transfer.

-You might qualify for a higher line of credit than you realize.
“People are definitely still able to get higher credit limits by simply asking,” said John Ulzheimer, a credit card expert.

“It’s a fairly simple transaction as long as they’re asking for a reasonable increase and most of the time it’s done without a credit report being pulled. If you ask for many thousands of dollars of an increase, then you should expect the issuer to pull your credit report and essentially re-underwrite the account,” he said.

But unlike the old days, it’s not common now for a credit card issuer to simply raise your available credit limit out of the blue.

In the days before the Great Recession, some consumers said they had access to more credit than they really wanted and they found it harder to manage that credit.

Remember when you’d just discover that suddenly you had a higher line of available credit whether you wanted one or not? Yeah, that was a long time ago.

Crews Cutts, chief economist at Equifax, said issuers want to get your permission before raising credit limits. So that’s why after my cupcake incident, the recorded voice asked me to update my income when I called my credit card issuer.

It’s a new regulatory regime, and card issuers need to play by some different rules of the game.
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ABOUT THE WRITER
Susan Tompor is the personal finance columnist for the Detroit Free Press

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