It might sound like a risky strategy at a time when millions of Americans are drowning in debt: keep raising the limit on people’s credit cards, even if they don’t ask.
But that’s exactly what big banks have been doing lately to turbocharge their profits, leaving customers with the potential to rack up even bigger monthly bills.
For years after the financial crisis, Capital One Financial Corp. resisted that step for customers who looked vulnerable to getting in over their heads. In internal conversations, Chief Executive Officer Richard Fairbank characterized the restraint as a radical theology, in part because it went beyond post-crisis requirements, according to a person with direct knowledge of the discussions.
But then Capital One — known for its “What’s in Your Wallet?” slogan — reversed course in 2018, after the bank came under pressure to keep revenue growing. The company’s revenue reached a record last year.
The same reversal is playing out across U.S. banking, as more customers get unsolicited access to additional credit, in what’s becoming a new golden age of plastic. The goal: to get consumers to borrow more. The question, just like in the heady 2000s, is how it will end for lenders and borrowers alike. Research shows many consumers turn higher limits into debt. And the greater the debt, the harder it is to dig out.
“It’s like putting a sandwich in front of me and I haven’t eaten all day,” said D’Ante Jones, a 27-year-old rapper known as D. Maivia in Houston who was close to hitting the ceiling on his Chase Freedom card when JPMorgan Chase & Co. nearly doubled his spending limit a year ago without consulting him. He soon borrowed much more. “How can I not take a bite out of it?”
The banks say the increases are good customer service and that they raise spending limits carefully, discourage reckless borrowing and let customers reverse the increases at any time.
Whatever the case, the immediate result is clear: debt, and lots of it. Outstanding card borrowing has surpassed its pre-crisis peak, reaching a record of $880 billion at the end of September, according to the latest data from the New York Fed’s consumer credit panel. That’s boosting profit at top lenders like Capital One, JPMorgan and Citigroup Inc. a decade after banks cut credit limits without warning during the crunch.
“Capital One examines a number of factors before determining whether a customer is eligible for a credit line increase, including reviewing their credit and payment history, debt-to-income ratio and ability to pay,” a spokeswoman said in a statement. She said the company offers customers tools to “help them manage credit wisely.”
JPMorgan said it makes sure borrowers don’t owe too much and avoids raising limits for subprime cardholders.
“In a very targeted way, we grant credit line increases to creditworthy customers who have demonstrated consistent usage of the card and have shown strong repayment patterns,” a JPMorgan spokeswoman said. Less than 1% of increases are reversed by customers, she said.
“I didn’t know there was a way to say no,” said Jones, the Texas rapper. He was making less than $30,000 after taxes when Chase gave him access to an additional $1,500 during the 2018 Christmas season. A lot of people would celebrate access to more money. But he said he was terrified he’d spend more than he could handle. After thieves damaged his car, he tapped the full credit line and could only afford to make the minimum monthly payment.
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Proactive credit line increases, known in the industry as PCLIs, emerged in the 1990s but virtually disappeared after regulators clamped down on the practice following the 2008 financial crisis. But as banks struggled to ramp up lending, PCLIs made a comeback with executives finding more aggressive ways to work within the consumer-protection laws.
U.S. issuers boosted credit lines for about 4% of cards in each quarter of 2018, according to the Consumer Financial Protection Bureau’s most recent data. That’s double the rate in 2012.
Subprime and near-prime customers got increases at a higher-than-average pace, according to the agency. That means many of the people getting boosts have blemished or limited histories of paying bills.