Banks have returned to the pre-2008 world of automatic credit limit increases for credit cards used by people already in debt

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“Proactive Credit Line Increases” (PCLI) occur when your credit card company increases your credit limit without you asking; it was very common before the 2008 crisis, but post-crisis rules have largely put an end to it. Now banks have uncovered regulatory loopholes that allow them to launch PCLIs to their most vulnerable customers, leading to record levels of nationwide credit card debt of $880 billion last September. more than the pre-crisis level.

Credit cards are the most profitable loans in the financial industry, and 2019 was the best year ever for bank credit card profits, with interest rates hitting a 20-year high. US banks earned $179 billion in credit card fees and interest in 2019, and 2020 should be even better. Credit card debt is the fastest growing form of debt in the United States.

Much of this PCLI activity is subprime – extending credit to people who are already over-indebted and who will likely miss payments, resulting in high penalties, which are hugely profitable for banks.

The number of people aged 19 to 29 in the United States who are more than 90 days behind on their card payments has just reached a ten-year high.

But after the stock fell in 2017, [Capital One] leaders were pressured to show they could meet growth targets. They eventually tweaked their models to offer raises to more customers, betting on an oddity in human behavior, according to the person with knowledge of the decision, who asked not to be named in the discussions. The company’s analytics showed that people tended to keep their card usage steady even after line increases. In other words, someone who used 80% of their line of credit before the boost will typically use the same percentage afterwards, generating more income.

Other researchers have come to similar conclusions. For consumers who carry balances on their cards, “nearly 100% of an increase in credit limits ends up being an increase in debt,” according to a working paper by Scott Fulford and Scott Schuh for the Federal Reserve Bank of Boston. About half of US credit card accounts carry a balance each month, the CFPB said.

Banks distribute enhanced lines of credit that no one asks for [Michelle Davis/Bloomberg]

(Going through Naked Capitalism)

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