Credit card lenders lure borrowers with new offers and rewards

Inboxes across the US are filling back up with credit card offers as the nation’s largest issuers hunt for loan growth, new data show. 

Online solicitations for new card customers jumped 85 per cent last month year on year as lenders trotted out enhanced rewards, higher credit limits and low promotional rates, according to Competiscan, an analytics group that tracks direct marketing.

Though the US economy has bounced back more quickly than anticipated, loan demand has remained stubbornly weak as customers, who largely spent less, saved more and used excess cash from stimulus programmes to pay down debt, have little use for new credit. 

Loan balances slid between 9 and 14 per cent year on year among the largest credit card lenders including JPMorgan, Citigroup and Discover in the first quarter. Now those lenders are at the forefront of a marketing blitz that is accelerating into the summer months. 

 POACHING LOANS

Among the primary tools making a resurgence are balance transfer offers that effectively poach loan balances from competitors.

The promotions, which give consumers the opportunity to consolidate debt on to a credit card interest-free for up to 18 months, quadrupled last month after mostly disappearing last year when most issuers were battening down the hatches in anticipation of a wave of defaults that never materialised.

“Balance transfers really are the engine that helps issuers keep outstandings on the books,” said Jessica Duncan, director of payments insights at Competiscan. 

But the customers who are most drawn to those offers tend to be riskier because they are already leveraged, she said. These deals were among the first to dry up when the economic outlook turned grim.

However, as the average US consumer emerges from the pandemic in better than expected financial shape and organic loan growth remains elusive, issuers are turning to the sweetener to prop up their loan books.

“[Lenders] still have to be cautious but they’ve just lost a per cent of balances that they didn’t anticipate, and they also have a bottom line to keep in mind,” Duncan said. 

Even with the surge, overall balance transfer offers are still at only 50 per cent of 2019 levels signalling lenders are being more cautious as they re-enter the market, the data showed. 

RAISING THE LIMIT

Initiatives to increase credit limits, which were very rare last year, also came roaring back last month, jumping more than 300 per cent, according to the data. 

Cards with higher limits are more likely to serve as customers’ primary credit card and capture the bulk of spending compared with other cards in their wallets. Customers with higher credit limits also tend to carry larger balances as most borrowers prefer to keep their utilisation below 35 per cent.

Sometimes lenders request more data from customers, like updated salary information and housing expenses before offering an increase, but often they raise limits at their discretion. 

Last month Citigroup, Bank of America and Capital One doled out unsolicited credit line increases to some customers with good credit history, raising those limits by as much as a third, according to offers reviewed by the FT and Competiscan data. 

Citigroup led the pack with the most increase notifications, according to Competiscan.

SOUPED-UP REWARDS

Credit card rewards, particularly on higher-end cards, never slowed down during the pandemic and are only becoming more competitive as issuers manoeuvre to capture more spending during the economic recovery. 

“Despite speculation that credit card rewards were getting too frothy and issuers would be forced to cut them in the next downturn, rewards climbed to all-time highs in 2020,” Wolfe Research analyst Bill Carcache wrote in a recent note to clients.

Cashback cards became popular among rewards chasers during the pandemic because of their versatility compared with dedicated travel cards. Last week both Citigroup and Wells Fargo unveiled new cashback cards with souped-up offerings in a sign that the trend is here to stay. 

Travel cards such as American Express’s Delta Air Lines card and Chase’s Marriott Bonvoy card have also sweetened their sign-up offers with added miles and points to capitalise on reopening trends.

However, analysts believe rewards rates will moderate or become reined in soon since the cost of the perks have become so high that they are approximately equal to what lenders earn on interchange fees for basic cards.

“Issuers may be on the verge of paying out more in rewards that they generate from spending,” Carcache said. 

But in the short term, issuers have some room to run due to better than expected credit quality trends, which have given them more leeway to invest in the business without meaningfully compressing margins, analysts said.

“If you are a credit card player, you’re most likely seeing lower charge offs than you budgeted for which means you’ve got some flexibility,” said Chris Marinac, a senior analyst at Janney research.

Overall, analysts say it may take a few more quarters for marketing to return to pre-pandemic levels as many lenders are still wary of potential credit risks that may have been obscured by stimulus and forbearance programmes.

“There is a danger in the industry of credit scores being sort of overinflated and credit models have trouble really determining what is credit risk given the totally unique things that we’ve observed in the last year,” Richard Fairbanks, Capital One chief executive, said at a recent industry conference.

His group is also increasing credit card marketing, but at a slower rate than peers.

“There can be a lot of wrong conclusions drawn.”