A Tale of Two Vintages: Credit Limit Management Before and after the Card Act and Great Recession

Abstract

This paper uses tradeline-level credit card data to examine initial credit limits and early credit limit increases before and after the Great Recession and implementation of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the CARD Act). I compare two vintages of credit card accounts, those opened in 2005 and 2011; I also follow each vintage for more than two years after the account opening. In general, I find that significantly less credit was extended to approved credit card applicants in 2011 than in 2005. Accounts in the 2011 vintage started out with lower initial credit limits, received fewer limit increases, and received a smaller increase amount in dollar terms. These changes were most pronounced among the riskiest 25 percent of accounts opened in 2011. For this segment of the market, the median initial credit limit fell 66.7 percent to $500, and the median limit increase amount fell by at least 25 percent at each observation point. At the same time, limit increases occurred more often and sooner for this group, perhaps in recognition of the very low starting limits.

Dynamic Pricing of Credit Cards and the Effects of Regulation

“…They also find that offered credit limits fell and interest rate spreads increased disproportionately among subprime consumers. This appears to be reflected in banks' credit card line management strategies before and after the CARD Act and the Great Recession (Santucci, 2015).…”

“…where R n j2 (i) and R o j2 (i) denote the best interest rate offers borrower i expects to receive at the beginning of period 2. 34 In a rational expectations equilibrium, we should have r n j2 (i) = R n j2 (i) and r o j2 (i) = R o j2 (i). Therefore, the second-period expected maximized utility of the representative borrower, prior to the realization of the first period income draw, is…”