Banks have taken it on the chin over the past several years. But after suffering from a long spell of bad credit card loans during the recession, they are finally getting some positive results from their credit card divisions.
Those improvements in repayment have cut losses substantially, which will allow many banks to improve their earnings by drawing on relatively high loan-loss reserves. That's very good news for banks, which are continuing to struggle to generate profits. (The recent JPMorgan Chase (JPM) London Whale trading debacle is a dramatic example of the risks banks are taking to boost their bottom lines.)
With their success in cutting losses, you'd expect that those credit card companies would be racing to offer new cards to customers. Unfortunately for millions of Americans with improving but still shaky credit, most issuers are taking the opposite approach by continuing to shut many customers out.
In response to the financial crisis, as delinquency rates soared, banks canceled many card accounts, reduced credit lines on others, and were quick to write off losses. It worked. Now delinquency rates have reached extremely low levels -- the current rate is less than half what it was in early 2009.
Little Error, Big Impact
Are Banks Giving Up on Credit Cards?
Credit card sign-on bonuses are certainly enticing, but you shouldn't be signing up for every card that's offering some cash back. This is because each application and subsequent credit pull will generate a hard inquiry that will appear on your creditreport. (Credit pulls that aren't used to decide whether you are actually getting a loan – for instance, one conducted by a landlord or by a bank when you are looking to get a checking account – are considered soft inquiries and will have no impact on your score.)
Each hard credit card inquiry will cost your score between three and five points and stays on your report for two years, though they only negatively impact your score for about half the time they appear.
One missed payment may seem innocuous enough, but in reality a single delinquency can cost a previously stellar credit score to fall more than 100 points. The good news: As long as the missed payment doesn't lead to additional woes, your score will start to rebound relatively quickly and it can get back to good standing in about 12 months following the delinquency.
You should think twice before officially closing that credit card you opened back in college, especially if you're getting ready to apply for a new line of credit. Closing an old account can have a negative impact on yourcreditscore since it can lower your credit-to-debt utilization ratio, which is essentially how much credit you have at your disposal versus how much credit you are actually using.
The exact effect this has on your score will vary, depending on the rest of yourcredit profile, but the advice is consistent.
"If there is no annual fee, just charge something small every now and then," says Adrian Nazari, CEO of Credit Sesame. This will keep the issuer from deciding to close the account for you.
As MainStreet has previously reported, it's never a good idea to bump up against your overall creditlimit because your credit utilization ratio will appear sky-high. However, according to Chris Mettler, founder of CompareCards.com, maxing out a single card can negatively influence your credit score as well. (Again, the exact impact would depend on the rest of your creditprofile.) As such, if you do have a particular card that's bumping up against its limit, you'll want to pay that down as soon as possible.
"You don't want your balance due to be over 33% of the availablecredit line," Mettler says.
Credit card issuers typically only report two things to creditbureaus each month: whether you're up-to-date on all your payments and what your balance at the time is. As such, running up big purchases right before your statement closes – and the issuer reports the information – can negatively impact your credit-to-debt utilization ratio and subsequent score, regardless of whether you go on to pay off that balance on time or not.
"The trick is to make sure your balance is low before it is reported," Nazari says. This is why it can be a good idea to pay off purchases as you make them or prior to the end date of your billing cycle.
Even if you're not particularly credit active, it's a good idea to take advantage of the free annual credit report the Fair Credit Reporting Act entitles you to, if only to scour it for incorrectly attributed delinquencies, accounts or inaccurate balances, which can all do varying amounts of damage to your score. This is because errors on credit reports are all too common. As MainStreet has previously reported, about 30% to 40% of all credit reports have some type of error on them, some of which can unfortunately be difficult (and time-consuming) to remove.
You may think that you don't owe that unpaid medical bill that keeps getting sent to your house, but your score is still in jeopardy if you decide not to pay it. Many places that don't lend money, like a hospital or cable company, will send their unpaid bills to a collections agency after a certain amount of time and they will report you to the credit bureaus. Similar to a missed mortgage, credit card or auto loan payment, this delinquency can cost good scores 100 points or more.
"Whether you are right or wrong, [the bill] will negatively impact your score," Mettler says. As such, consumers may want to shore up the bill in an effort to spare their score or dispute the bill through proper channels to get it eradicated.
This is the time when banks would typically reach out for more customers. New regulation, however, has given credit card issuers less latitude to charge high rates and fees on those with less-than-ideal credit, and many banks have apparently decided that those customers aren't worth the risk.
Instead, banks have targeted less-creditworthy customers for other products. In particular, prepaid cards represent a chance to serve a group of customers that hasn't had much access to traditional banking services. With the opportunity to charge higher fees than they can on other cards, banks are looking to expand their prepaid card business as an answer to credit- and debit-card regulation.
It's possible that when a stronger economic recovery emerges, banks will once again move more aggressively into the credit card market. But for now, card issuers are holding back -- and millions of potential customers could have to resort to less attractive alternatives.
Motley Fool contributor Dan Caplinger finds the ebb and flow of the credit card business fascinating. You can follow him on Twitter here. He doesn't own shares of the companies mentioned. The Motley Fool owns shares of JPMorgan Chase.