5 ways the global recession is affecting credit cards and banks — and the upside for some cardholders
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The coronavirus pandemic has pushed the global economy into a recession, forcing some banks to prepare for major defaults and reconsider the creditworthiness of some customers. But some banks are also working hard to retain valuable customers.
So, let’s take a look at some of the ways this huge economic downturn may affect current cardholders and consumers in the market for a new rewards credit card.
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Banks are building credit reserves
Most banks anticipate that some of their customers will default on payments. Just how much some banks are preparing became evident as first-quarter reports were announced:
- JPMorgan Chase increased its reserve by $6.8 billion in the first quarter of 2020, primarily because of the effects of COVID-19.
- Citigroup increased its credit reserve by $4.9 billion in the first quarter of 2020.
- Capital One increased its allowance for credit losses by $3.6 billion in the first quarter of 2020.
- American Express increased its reserve by $1.7 billion in the first quarter of 2020, citing COVID-19 as the primary reason.
In the coming months, banks will be looking to limit their losses as much as possible while still planning for the long term.
Related reading: How to recession-proof your credit score
Banks are providing credit card relief
It’s best for your credit score and wallet if you pay your bill on time each month, ideally in full to avoid paying interest on your balance. But as unemployment grows and some employees are furloughed, some cardholders aren’t going to be able to even make minimum payments.
Related reading: How to check your credit score for absolutely free
If you can make your minimum payment, you should do it, but if not, you may want to ask for relief from your issuer. This relief may take the form of decreased interest and fees, or you may be allowed to delay your monthly payment for a few months. But it’s important to read the terms carefully before accepting relief, as it could result in your account and rewards being frozen. And some cardholders have reported that their credit line was decreased when they requested assistance. So, you should only request assistance if you truly need it, since doing so marks you as a risk.
Banks are reassessing creditworthiness
These are strange times when someone with a good credit score may suddenly be out of work and unable to pay their bills. In this situation, banks are reassessing the creditworthiness of their current cardholders as well as new applicants.
As such, some banks may cut credit limits for cardholders in the coming months and be bearish when accepting new cardholders. For example, in the past couple of weeks we’ve seen at least one issuer change the suggested credit for select cards from good credit to excellent credit. And, Chase recently began requiring potential small-business card applicants to sign into a Chase account before starting the application process.
I expect that we’ll temporarily see card issuers being more selective when accepting new cardholders or increasing the credit line for current cardholders. As such, applicants with borderline credit or limited credit may need to work to build their credit longer, potentially as an authorized user or with a secured credit card.
Related reading: The best credit cards for excellent credit
Banks are changing their card lineup
Recently Chase removed three cards from its landing page — the Chase Slate, the United Club Business Card and the Southwest Rapid Rewards® Premier Business Credit Card. Although you can still find application links for the United and Southwest cards through the airlines’ pages, this is a clear sign that Chase doesn’t want to encourage applications for these cards.
I fully expect we’ll see card issuers temporarily stop accepting applications for cards that are designed for less-creditworthy customers or that tend to attract higher-risk customers. This is a way to limit risk.
Related reading: The best travel credit cards
Banks may buy miles and/or points
Many airlines and hotels have credit cards that are issued by one or two banks. For example, here are some of the partnerships that each bank has:
- American Express: Delta, Hilton and Marriott
- Chase: United, Southwest, British Airways, Air Lingus, Iberia, Hyatt, Marriott and IHG
- Citi: American Airlines
- Barclays: American Airlines, JetBlue, Hawaiian Airlines, Frontier, Choice Hotels and Wyndham
- Bank of America: Alaska Airlines, Spirit Airlines, Allegiant, Virgin Atlantic, Asiana and Air France / KLM
In previous times of financial uncertainty, airlines have been able to leverage their credit card partnerships for a financial boost. For example, TPG’s Zach Wichter recently reported that banks have purchased millions of miles from American Airlines, Delta and United during past financial troubles. An industry analyst told Wichter that it’s likely the banks that issue airline cards will purchase miles during this financial downturn as well.
We don’t know the rate at which airlines and/or hotels may sell miles and/or points to banks, nor which programs will do so and in what quantities. But purchases like these could be a positive for cardholders because they could make points/miles purchases less expensive. Plus, the banks will want to take steps like offering increased sign-up bonuses to make sure miles are being used.
Related reading: Cobranded credit cards may help airlines recover from coronavirus
What’s the upside for some cardholders?
In this time of uncertainty, banks want to attract and retain cardholders with high creditworthiness who will spend a lot on their cards but have a very low risk of default. As such, these cardholders may stand to gain in terms of incentives and higher welcome bonuses.
Incentives for spending on some cards
Issuers and their partners have introduced various incentives recently to encourage spending on some cards. For example, for a limited time, spending on select cobranded American Airlines credit cards will count toward American Airlines Million Miler lifetime elite status. And American Express recently announced 2x Membership Rewards earning on various foreign-issued Amex Platinum Cards — and hinted at future enhancements for U.S.-issued cards.
Related reading: The best travel rewards credit cards for each bonus category
Retention offers and statement credits
During a time when travel rewards credit card holders may be frustrated that they can’t use many of their card’s benefits such as lounge access, free-night certificates and other travel perks, issuers may be willing to extend retention offers or statement credits to select cardholders. For example, some cardholders of The Platinum Card® from American Express have reported that they got points or cash-back offers even if their $550 annual fee (see rates and fees) isn’t due yet. And, Chase gave all Chase Sapphire Reserve cardholders with an annual fee renewing between April 1, 2020, and July 1, 2020, a $100 statement credit towards their annual fee.
With card issuers looking for higher-quality, lower-risk applicants — and potentially purchasing a stockpile of points and miles from their cobranded partner airlines and hotels — we may see some lucrative welcome bonuses once non-essential travel can resume. It will likely take a strong credit score and credit history to be approved, however, as issuers may be bearish regarding new applications for a while.
Related reading: Cards currently offering welcome bonuses of 100,000 points or more
Featured photo by Wyatt Smith/The Points Guy.
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