◼ FINANCE Bloomberg Businessweek January 27, 2020
25following the 2008 financial crisis. Recently, PCLIs
have made a comeback, with executives finding
ways to work within the consumer protection
laws. U.S. issuers boosted credit lines for about
4% of cards in each quarter of 2018, according to
the Consumer Financial Protection Bureau’s most
recent data. That’s double the rate in 2012.
Subprime and near-prime customers got
increases at a higher-than-average pace, accord-
ing to the agency. That means many people getting
boosts have blemished or limited histories of pay-
ing bills. Analysts warn that issuers have chosen a
dicey time to get aggressive about lending. It’s late
in the credit cycle—lending has soared as the finan-
cial crisis has faded and the economy has strength-
ened. Outstanding card debt reached a record of
$880 billion at the end of September, according to
the latest data from the Federal Reserve Bank of
New York. An economic downturn could mean pain
for banks and consumers.
But for now, increasing limits looks like good
business. Issuers make money on interest charges
and fees on such things as interchange, penalties,
and cash advances. Those streams helped make
2019 the industry’s most profitable year on record.
Interchange fees are paid every time a customer uses
a card, while interest revenue is higher the more a
customer owes. That encourages banks to find peo-
ple who will carry the largest balance possible with-
out tipping into default. Experian Plc, a credit report
company, advises banks that unilaterally raising bor-
rowing limits is “a crucial step” in creating revenue.
With interest rates on credit card balances reach-
ing the highest level in more than two decades last
year, U.S. issuers pulled in revenue of $179 billion
from interest and fees, according to data from pay-
ments consultants R.K. Hammer. Card compa-
nies will likely earn the highest returns in banking
in 2020, according to Bloomberg Intelligence.
Lawmakers have put some protections in place.
Card companies must consider customers’ “abil-
ity to pay” before boosting limits. In practice, that
means calculating whether a consumer would be
able to make the minimum monthly payment due
if the entire credit line were used. With minimum
payments typically around 2% of the balance, cus-
tomers need to be able to cough up roughly $25 a
month for every $1,250 in credit. In reality, some-
one making payments at that pace would need
years to pay down the balance, accruing interest
that can surpass the original purchase.
Some countries have stricter rules. U.K. banks
agree not to offer increases to customers in per-
sistent debt. Canada requires a borrower’s consent.
Australia bans unsolicited increases altogether.
“I didn’t know there was a way to say no,” says
Jones, the Texas musician. He was making less than
$30,000 after taxes when Chase gave him access to
an additional $1,500 during the 2018 Christmas sea-
son. He says he was terrified he’d spend more than
he could handle. After thieves broke into and dam-
aged his car, he tapped the full credit line and could
afford to make only the minimum monthly payment.
Capital One was one of the first card issuers to
use big data analysis, pioneering teaser offers, and
tailored interest rates, which helped it reel in and
manage less-than-perfect borrowers. But after the
stock slipped in 2017, executives came under pres-
sure to show they could meet growth targets. They
eventually tweaked their models to offer increases to
more customers, betting on a quirk in human behav-
ior, according to the person with knowledge of the
decision, who asked not to be named discussing
the talks. The company’s analyses showed people
tended to keep their credit limit utilization steady,
even after line increases. In other words, someone
who used 80% of a credit line before the boost would
typically use the same percentage afterward, gener-
ating more revenue.
Capital One says a customer’s ability to pay down
debt “has been and continues to be a fundamental
consideration” in its credit decisions. The company
says its tools to help customers keep card use in
check include credit lines that start low and increase
gradually. “Acting in the best interest of our custom-
ers is our paramount consideration,” it says.
Other researchers had come to a similar conclu-
sion as Capital One did about the effect of higher
limits. For consumers who carry balances on their
cards, “nearly 100% of an increase in credit limits
eventually becomes an increase in debts,” accord-
ing to a 2015 working paper by Scott Fulford and
ScottSchuhfortheFederalReserveBankofBoston.
AbouthalfofU.S.creditcardaccountscarrya
balance each month, the CFPB said.
Caitlynn Patchett, a 24-year-old case manager
at a nonprofit in Illinois, owed about $1,000 on her
card when Chase doubled her limit. She says she
knew the bank was being too generous, but that
didn’t stop her from buying three rings from the
jeweler Pandora—two more than she would have
allowed herself before the increase.
Since 2006, credit card debt has been grow-
ing faster than any other type of consumer debt,
including student loans, according to a report by
Morgan Stanley strategists. “Household balance
sheets may be more stressed than we realize,” they
wrote. Even with the U.S. economy humming—
with the lowest jobless rate in a half-century and
wages inching upward—the share of credit card2009 2019$31k2825▼ Average U.S.
cardholder’s total
credit limit