During financial crises, banks have less money to lend, and consumers are more likely to become delinquent on their credit card payments. To prevent that from happening, credit card issuers typically decrease consumer credit lines. According to a report by CNBC, a lower credit card limit usually means that cardholders are more likely to use a greater portion of their available credit each month, which negatively affects their credit scores and ability to borrow money.
In a regulatory filing Wednesday, Discover Financial Services revealed that it's been lowering credit lines for new customers.
“As the number of loans enrolled in these programs increases, our financial results will be adversely impacted in the short term due to forgone interest,” Discover said in a statement.
On Thursday, Discover Chief Executive Officer Roger Hochschild said that the company would be taking more measures to verify employment and establishing lower limits for new accounts, as well as restricting credit line increases for existing customers.
“As part of our credit response to COVID-19, we haven’t made any changes in terms of closing inactive accounts or doing more line decreases,” Hochschild said in an interview Thursday, Bloomberg reported. “We think it’s very challenging to do those now. Pulling away credit when they need it most can have tremendously adverse impacts.”
Discover’s announcement comes after Synchrony Financial, which manages credit cards for companies like J.C. Penney, The Gap and American Eagle Outfitters, said it was evaluating various customer accounts.
In a conference call Tuesday, Synchrony’s Chief Financial Officer Brian Wenzel said that the firm is using its own data as well as other data from credit bureaus to “dynamically reevaluate a customer’s creditworthiness.” That means that while some customers might be allowed to spend more with their cards, others’ spending will be restricted.
In addition, Matt Schulz, chief credit analyst at LendingTree, said in a statement to CNBC Thursday that LendingTree “knew the purge was going to come at some point,” but “it looks like it may have started.”
Amid the pandemic, many financial institutions, including Ally Financial, Bank of America, Citi and Fifth Third Bank, are also offering temporary hardship assistance, which allows consumers to skip payments or pay less than normally required during a certain time frame.
Following the 2008 financial crisis, many banks also cut consumer spending limits, which ended up lowering cardholders’ credit scores, according to Bloomberg.
