In uncertain times, lenders tend to focus on the types of loans that have the lowest risk of loss, and trim back on issuing types more liable to wind up delinquent -- or be defaulted on -- if the economy worsens. Thus far in the COVID-19 pandemic, many banks have already stopped accepting applications for home equity lines of credit (HELOCs), and some have significantly raised their lending standards for mortgages.
It looks like credit card lending will be the next area to see a similar tightening.
Specifically, several credit card companies appear to have adopted more selective standards for 0% APR balance transfer offers, if they are even still making them at all. American Express (NYSE:AXP) has reportedly stopped offering balance transfer deals altogether, while other leading credit card lenders such as JPMorgan Chase (NYSE:JPM), Citigroup (NYSE:C), Bank of America (NYSE:BAC), and Capital One (NYSE:COF) are dramatically reducing their balance transfer deals.
Why get rid of balance transfers?
To be sure, credit cards are already a relatively risky type of lending even when there isn't a global pandemic or recession. When consumers fall on hard times, they tend to prioritize bills like their mortgage and car loans over unsecured debts like credit cards. However, because credit card interest rates are relatively high, it can still be a profitable form of lending.
Balance transfers are another story. Generally speaking, they aren't very profitable for the bank -- it collects no interest for a year or more in many cases on the funds it's loaning. If the customer pays down their balance before interest kicks in, all the lender will make on the transaction is a small balance transfer fee.
But the goal with a balance transfer offer is to recruit a credit card customer who will be profitable to the lender in the future.
Not only are balance transfers not immediately profitable, but they also tend to perform badly in tough times. During the Great Recession, the default rates on balance transfers were among the highest in the credit card industry.
That's in part a natural result of the fact that customers who take advantage of balance transfer offers already have high levels of credit card debt in many cases, making them generally riskier borrowers. And given that 40 million people have filed for unemployment since the pandemic started, that risk could be one that fewer banks are willing to take -- for now.