Banks boost borrowers’ card limits without telling them, report finds

Dive Brief:

  • Banks are raising the borrowing limit on customers’ credit cards without their knowledge, a Bloomberg report[1] indicated Thursday.
  • Outstanding card borrowing reached a record $880 billion[2] at the end of September, according to a November report from the Federal Reserve Bank of New York.
  • Capital One analysis showed customers use the same percentage of their credit line before or after a limit increase, meaning the same customer carrying $4,000 in debt on a $5,000 limit would be prone to carry $8,000 if the ceiling was $10,000. The company began offering higher limits to customers after executives were pressured in 2017 to meet growth targets, a person with knowledge of the situation told Bloomberg.

Dive Insight:

The Federal Reserve Bank of Boston concluded similarly, in a December 2017 paper, that “nearly 100% of an increase in credit limits eventually becomes an increase in debts.”[3]

Since card issuers make money through fees and interest, and interest revenue increases as a customer owes more, it is reasonable that banks can benefit by targeting consumers to carry large balances without defaulting.

U.S. issuers took in $179 billion from interest and fees last year, according to data from payment consultants R.K. Hammer cited by Bloomberg. And interest rates on credit card balances reached the highest level in more than two decades.  

Regulators curbed proactive credit line increases — the practice of boosting customers’ available balances without their knowledge — after the 2007-08 financial crisis. Countries such as Australia have banned them. Canada requires consent from borrowers. And British banks have agreed not to offer increases to customers in persistent debt. In the U.S., the Credit Card Act of 2009 requires banks to consider customers’ “ability to pay” before boosting limits. That means calculating whether a consumer would be able to make the minimum monthly payment due if the entire credit line were used. 

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