By Ray Birch
GAINESVILLE, Fla.—The lessons card issuers learned from the Great Recession have helped to boost credit performance among U.S. consumers during the COVID-19 pandemic, according to one expert, who also cautions trouble may still lie ahead.
Bill Hardekopf of CardRates.com said as the pandemic began to sweep across the nation in 2020, card issuers quickly looked in the rearview mirror.
“I believe issuers thought, oh my goodness, this is going to be exactly like 2008 and 2009,” Hardekopf said. “They began pulling back credit. They were not approving people like they did before the health crisis.”
Hardekopf said that strategy became very clear as issuers began to cut back significantly on their promotions.
“They actually took their cards out of the affiliate programs, took them out of all sorts of credit card comparison sites. They just did not want people applying for credit cards at that time. Issuers feared there would be a run on credit, like what happened in 2008 and 2009, when people had to turn to credit cards to survive,” said Hardekopf. “They just stopped making offers. All that direct mail we get from the big issuers—we just stopped getting that. They did not want to increase their liabilities. They also raised their credit standards, I suspect.”
As CUToday.info recently reported, the nation’s 14 largest credit card issuers slashed $99 billion from their customers’ spending limits in 2020, mostly affecting financially troubled households.
Waiting For Delinquencies
A decade ago, as the economy tanked there was a huge spike in delinquencies during the Great Recession, noted Hardekopf.
“Issuers thought 2020 would be identical to the Great Recession, but it wasn’t,” said Hardekopf, citing several reasons beyond the newly cautious nature of issuers, including improvements in credit quality for many people, the inability to travel and get out of the house, and stimulus checks.
As CUToday.info has reported throughout the pandemic, consumers turned more to debit, especially since many had more money in their accounts. Deposits have grown to record levels at credit unions across the country.
Bill Hardekopf
Rising Credit Scores
New Experian data show that despite the economic troubles some consumers have faced in the past year, credit scores have risen to record levels. At the start of 2020, the average FICO credit score was 703. By October, the average FICO credit score had increased to 711, Experian said.
“There were a lot of people who had their income cut. But just when it comes to spending, most people had no choice but to cut back—often cut way back,” Hardekopf explained. “They couldn't go anywhere. You couldn't go to the sporting events. You couldn't go to a movie. Spending stopped. A second positive impact on credit was the stimulus checks. Many people were still able to make their payments and they did not have to charge all sorts of things on their credit. Go back to the Great Recession and people got slammed during that period because they had to start charging a lot of their daily expenses to credit cards. It was a very different experience than today.”
One more factor may have made consumers more cautious and careful with their spending, added Hardekopf.
“I am not sure how much this affected consumers’ thinking, but I think there was a bit of a fear factor with the pandemic,” said Hardekopf. “Earlier last year, people were thinking, ‘Oh my gosh. What are we in for?’ It was a big problem that was not isolated to certain states, as what happened with the mortgage crisis in 2008. The pandemic affects everyone and everything. There was this fear of the unknown and I think that made people tighten their belts simply because they had no idea what was going to happen.”
Looking Ahead
Looking ahead, Hardekopf believes consumers are likely ready to spend, but issuers are not just open the credit gates to everyone, as delinquencies could still be on the horizon.
A recent report from TransUnion shows serious delinquency rates in at the close of 2020 were down 89 basis points from the 10-year peak of 2.18%, observed in Q4 2019. But TransUnion also projected delinquencies will rise this year.
“I believe those who have kept their jobs are ready to go and spend,” said Hardekopf. “I wouldn't say they’re going to go crazy, but they're ready for the country to be free from all the effects of the pandemic and to live a little bit—go out to dinner more, go to a ballgame, take a trip … Celebrate and say they survived the pandemic. I think issuers will offer those people, those with good to excellent credit, larger lines and credit might improve for these people.”
But for those struggling with job loss and bills mounting as stimulus checks fade away, it is a different story, Hardekopf said.
“I think issuers will take a cautious approach with these people,” he said. “I think it will take some additional time for the people that have lost their jobs to come back.”