Fed Report Shows Banks Tightening Lending Standards on Credit Cards

This is a guest post by Bill Hardekopf, CEO of LowCards.com.

On Monday, the Federal Reserve released its quarterly Senior Loan Officer Opinion Survey on Bank Lending Practices.

The survey shows that banks have maintained their tight grip on credit card loans and are reducing credit limits. It also shows that more lenders continue to raise the minimum required credit scores on credit card accounts, making it more difficult for some consumers to be approved for credit cards.

Here are some of the results of the survey:

• Nearly 60 percent of survey respondents indicated that they had tightened lending standards on credit card loans, about the same proportion as in the January survey.
• Approximately 55% of the respondents reported having raised minimum required scores on credit card accounts over the previous three months. The report says this is a somewhat higher proportion than in the January survey.
• Approximately 65% indicated that they had lowered credit limits to either new or existing credit card customers, a very large increase over the 45% reported in the January survey.

“These numbers show that you will find it very difficult to be approved for a new credit card if you do not have good or excellent credit. We don’t see this changing anytime soon. Despite the political rhetoric and bills passing in Congress, we probably won’t see credit card reform until sometime in 2010. Right now, the best protection consumers have is to take care of your credit score,” says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook. “Banks continue to raise the bar for credit scores and are becoming more selective on which customers to approve. Since the credit score is the most important factor for loan approval and interest rates, consumers must do all they can to improve their score.”

Tips for building a good credit score:

• Pay your bills on time. Late payments, the most common piece of negative information appearing on credit reports, are often responsible for significant drops in credit scores. Make at least the minimum payments on your credit cards and loans on time each month.

• Keep your accounts open, especially your oldest accounts because longevity with these long-standing accounts looks good on a credit report. “We used to recommend closing some of your newer accounts that you no longer use. However, actions by issuers have changed that. Since they are reducing limits and closing accounts, keeping the accounts you have, even if you never use them, can actually help your debt-to-credit-limit ratio, which helps your credit score,” says Hardekopf. “If you have a rarely used credit card, occasionally put a charge on it and pay it off immediately.”

• Keep your debt-to-credit-limit ratio under 30%.

• Use your credit card at least once each month and pay it off in its entirety as soon as the bill arrives.

• Keep your bank record clean; an insufficient funds problem with your bank could show up on your credit report.

• If you have a good credit card, keep it. Maintaining a card and building a good payment history helps build your credit score. Creditors want you to have a long, dependable credit history.

• If you are just getting started, don’t open several new accounts all at once because that will lower your average account age. Opening too many accounts during a short period looks risky even for the best borrower.

• Having a variety of loans that you pay on time each month, such as a mortgage or car loan, helps build your score. Get into the habit of paying all bills, including mortgage and utilities, before the due date.

• Pay off your balances; don’t continue to transfer them to another card or loan. If you are having trouble paying your bills, contact your creditors to work out a payment plan or see a legitimate credit counselor. This will help you manage your credit and improve your score over time. A good place to start is the National Foundation for Credit Counseling.

• If you have past due accounts, pay off the one that is closest to being current first.

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LowCards.com simplifies the confusion of shopping for credit cards. It is a free, independent website that helps consumers easily compare credit cards in a variety of categories such as lowest rates, rewards, rebates, balance transfers and lowest introductory rates. It also gives an unbiased ranking and review for each card. The LowCards.com Complete Credit Card Index is the most objective and comprehensive resource on the Internet which allows consumers to compare rates for all 1260 credit cards offered in this country. Created by Hampton & Associates, the company has been analyzing the credit card industry and supplying objective websites on various consumer expenses for eight years.