5 ways the ongoing recession is affecting credit cards and banks — and the upside for some cardholders
Editor’s note: This is a recurring post, regularly updated with new information.
The coronavirus pandemic pushed the global economy into a recession. As such, some banks prepared for major defaults and reconsidered customer creditworthiness. But, at the same time, banks also worked to retain valuable customers.
Initially, many people expected the U.S. recession to be V- or U-shaped. But the recession now appears K-shaped. After all, some industries have recovered while others continue to struggle. So today I'll look at some of the ways this K-shaped recession may affect current cardholders and consumers in the market for a new rewards credit card.
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Banks have built credit reserves
Even in standard times, most banks anticipate that some of their customers will default on payments. However, quarterly earnings reports in 2020 showed most banks increased their credit reserves in early and mid-2020 to prepare for higher-than-normal defaults. In particular, these reports showed:
- JPMorgan Chase increased its reserve by $6.8 billion in the first quarter and by $8.9 billion in the second quarter before decreasing its reserve by $569 million in the third quarter.
- Citigroup increased its credit reserve by $4.9 billion in the first quarter, by $5.6 billion in the second quarter and by $314 million in the third quarter.
- Capital One increased its allowance for credit losses by $3.6 billion in the first quarter and by $2.7 billion in the second quarter before decreasing its reserve by $742 million in the third quarter.
- American Express increased its reserve by $1.7 billion in the first quarter and by $628 million in the second quarter before decreasing reserves in the third quarter.
As the pandemic and its subsequent recession linger on, banks will continue to limit their losses as much as possible while still planning for the long term.
Related: 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 remains high, some cardholders aren't even able to make minimum payments.
If you can make your minimum payment, you should do so. But if you can't find the funds, 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 the bank freezing your account and rewards. And some cardholders reported their bank decreased their credit line after they requested assistance. So you should only ask for help if you genuinely need it. After all, doing so may mark you as a risk.
Related: How to check your credit score for absolutely free
Banks continue to reassess creditworthiness
These are strange times. After all, someone with a good credit score who historically reported high income might suddenly be out of work and unable to pay their bills. As such, banks are continuing to reassess the creditworthiness of their current cardholders. In doing so, some banks have cut credit limits for select cardholders.
Some banks are also bearish when accepting new cardholders. For example, during the pandemic, I've noticed at least one card issuer change the suggested credit for select cards from good credit to excellent credit.
I haven't had any issues getting approved for credit cards during the pandemic. But applicants with borderline credit or limited credit may need to build their credit longer, potentially as an authorized user or with a secured credit card. Likewise, applicants who report lower income when applying for a new card may struggle to get approved even with an excellent credit score.
Related: Why banks are struggling to assess creditworthiness during the coronavirus pandemic
Banks are refining their offerings
During the pandemic, many issuers leaned into cash-back rewards cards due to consumer interest in these cards. Some issuers also paused applications for cards designed for less-creditworthy customers and for cards that tend to attract higher-risk customers. After all, issuers are looking to limit risk.
But, especially as the K-shaped recession sees select industries and consumers recover, we've seen some card issuers actively seek new cardholders for premium travel rewards cards. In particular, we've already seen several issuers offer elevated welcome offers and sign-up bonuses. We've even seen new products such as the United Club Infinite Card and the Chase Freedom Flex launch amid the pandemic.
Related: 10 cards currently offering sign-up bonuses of 100,000 points or more
Banks are stocking up on miles and 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, Aer 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 leveraged their credit card partnerships for an economic boost. For example, TPG's Zach Wichter reported banks had purchased millions of miles from American Airlines, Delta and United during past financial troubles.
In May 2020, TPG's Ethan Steinberg found several major travel brands had already raised emergency funds by preselling points. We don't know the rate at which these travel brands sold miles or points to banks. But purchases like these may mean banks will be more generous with welcome offers, sign-up bonuses and bonus category earning rates.
Related: 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, banks may offer higher welcome offers and sign-up bonuses to select cardholders. But current cardholders can also benefit in two primary ways.
Incentives for spending
Issuers and their partners introduced various incentives to encourage spending on some cards during the pandemic. Many of these incentives ended at the end of 2020. But some card issuers have introduced new perks to encourage card use and loyalty. For example, there are some excellent Amex Offers to be found. And Amex recently unveiled a new slate of limited-time benefits for several of its cards.
Related: Have card issuers opened Pandora’s box by offering temporary pandemic benefits?
I haven't had any luck getting retention offers on travel rewards cards I've considered canceling during the pandemic. And TPG's Chris Dong wasn't able to secure a retention offer for The Platinum Card® from American Express, although he ultimately decided to keep his Amex Platinum anyway.
But some cardholders have gotten retention offers when they've called to cancel their card. For example, TPG's Victoria Walker recently snagged retention offers on two of her cards. Specifically, American Express gave her two retention offers totaling 27,500 American Membership Rewards points within one week. So it's worth calling to see offers on your account before simply canceling your card.
Related: Pros and cons of downgrading your credit cards right now
Several card issuers are now looking for high-quality, low-risk applicants after purchasing a stockpile of points and miles from their cobranded partner airlines and hotels. So it's not surprising that we've seen — and will likely continue to see — lucrative sign-up bonuses. However, it may take a healthy credit score and credit history to be approved as most issuers are still bearish regarding new applications.