Capital One is taking steps to reduce some cardholders' credit limits while closing out inactive accounts. Should we be reading into that?
Credit card companies are generally happy when you spend during good economic times, but they turn cautious when they detect weakness in the economy. Lowering credit limits and closing inactive accounts are two ways to limit a company's exposure.
Capital One CEO Richard Fairbank, speaking on the company's recent earnings call, made clear this isn't a sudden move.
“We’ve been talking caution for really probably two and a half years at this point relative to credit lines,” Fairbank told analysts. "But within the last year or so, we’ve even kind of further dialed back on initial lines.”
Fairbank said there's nothing troubling in Capital One's lending portfolio, but the company is taking this step now "more out of this just kind of intuitive concern about the marketplace.”
Similar move by Discover
Capital One isn't alone on this issue. In an interview with The Wall Street Journal, Discover CEO Roger Hochschild said his company is also taking steps to reduce exposure. It too is canceling inactive cards, but it is also cutting back on balance transfer offers to consumers who fall into the subprime category.
In fact, Both Capital One and Discover appear to be moving to limit their exposure to subprime consumers, who often serve as the canary in the coal mine when the economy heads south. One need only recall the 2008 housing bust, caused by a wave of subprime foreclosures that turned a garden-variety recession into the Great Recession.
As the recession deepened, most credit card lenders began unilaterally closing accounts, even those in good standing. The reason was simple. Credit card debt is unsecured. If a cardholder defaults, the lender holds no collateral to limits its losses.
Damaging to credit scores
While a lender's action might be understandable from a business standpoint, it's a big problem for affected cardholders. Not only do they have access to less credit, but that reduced access -- especially if an account is closed -- reduces the consumer's credit score.
If you have a Discover or Capital One card you haven't used in a year or more, it would be wise to immediately make a small purchase and pay off the balance. That way you could argue the account is not inactive.
The economy still appears to be strong and the job market good for consumers, but Capital One and Discover, which tend to have more credit-challenged consumers as customers, is definitely flashing a caution signal.