Your Credit Card Company May Be Asking About Your Job Status

(Bloomberg Businessweek) -- Credit card lenders have a new task topping their to-do lists: figuring out who still has a job. It's harder than you might think.

A clampdown on credit is coming. A chorus of lenders, from Discover Financial Services to Capital One Financial Corp. to Synchrony Financial, have said they've begun to tighten up. The measures vary by company but can include tougher underwriting, handing out smaller loans, or reducing the number of credit line increases for customers. Some lenders are also doing more employment verification.

“Everyone's doing something,” says Sanjay Sakhrani, an analyst at Keefe Bruyette & Woods. “As a whole, you've got to prepare for the worst and hope for the best.” About 25% of cardholders had their credit limits lowered or their accounts closed altogether in the past 30 days, according to a survey conducted by CompareCards in late April.

The pullback from anxious lenders comes as millions of Americans are seeking additional funds, with large swaths of the economy shut down because of the coronavirus pandemic. A recent study by CreditCards.com found that 23% of consumers with credit card debt—or about 28 million U.S. adults—have added to that debt as a direct result of the outbreak.

About 7% of consumers said they're hoping to open a new credit card to make ends meet, while 10% said they're hoping to take out a personal loan to do so, according to a survey by TransUnion. “It's a very difficult environment,” says Paul Siegfried, senior vice president and credit card business leader at TransUnion. “If there's no income, it would be very difficult for many lenders—if not all lenders—to actually extend an obligation if it's unclear that a consumer has an ability to pay.”

Many banks are focusing on getting more data on their customers. For instance, while banks often ask them about their employment and salary during the loan application process, that data becomes harder to maintain over time as consumers switch jobs or get promoted. So in recent weeks, lenders have rushed to establish how many customers have been laid off or had their pay reduced.

“It's tough for consumers—who probably need credit right now. But if it's not clear you can repay it, it's going to be a bit of a catch-22 for people,” says Lauren Saunders, associate director at the National Consumer Law Center. “It's understandable that creditors want to ensure that people taking out loans can afford to repay them. And checking employment and salaries is a natural part of underwriting.”

This has been a boon for Equifax Inc., which maintains a real-time database of salary and employment information on 80 million U.S. workers. The company expects the service, which is called the Work Number, to post record growth this year because banks have clamored to use the database in the past few weeks. “What we're hearing from our customers”—the lenders—“is that understanding the impact of forbearances and delinquencies is a challenge, and it's more challenging now than it was in the global financial crisis,” Equifax Chief Executive Officer Mark Begor told analysts on a conference call in April.

The pandemic has presented banks with a credit management challenge unlike any they've seen. Past payment histories aren't a reliable guide to who may be in trouble now. At American Express Co. about 845,000 accounts have enrolled in the company's forbearance programs. Almost 90% of those customers had credit scores that would be considered prime or superprime. “These are not people who are used to being in stress,” AmEx Chief Financial Officer Jeffrey Campbell said on a conference call in April. “This is such an unprecedented environment.”

Historically, banks have seen net charge-offs rise and fall in step with unemployment levels in the U.S. But lenders think some of the impact may take longer than usual to show up in their data. The federal government has pumped an unprecedented amount of fiscal stimulus into the U.S. economy. Direct payments and amped-up unemployment insurance, along with a massive uptick in lenders' offering temporary forbearance, could potentially offset or delay the impact layoffs will have on workers. Although that could ultimately help credit card companies weather the storm of defaults, for the moment it's left them in an uncertain position about how consumers are really faring. So they aren't waiting for all the data to come in.

“No two downturns are the same,” said Capital One CEO Richard Fairbank in a conference call with analysts in April. “Our strategy in the face of the current challenges and uncertainties is to aggressively manage credit.”
 
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