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href="https://bpi.com/sign-up/">Subscribe</a> </li> </ul> </nav> <div class="header-end normal-end"> <button class="button text search-button" aria-label="Search"> <span class="fas fa-search"></span> </button> <button class="button text mobile-menu-button" aria-label="Menu"> <span class="fas fa-bars"></span> </button> </div> <div id="search-bar"> <algolia-search-cta index-prefix="prod_"/> </div> </header> <main id="main"> <div id="search-cta"> <algolia-search-cta index-prefix="prod_"/> </div> <article> <section class="breadcrumbs"> <div class="breadcrumbs-holder"> <a href="/" title="Bank Policy Institute Homepage" class="breadcrumb-item"> Home </a><span class="separator">/</span> <a href="/category/consumer-affairs" title="Consumer Affairs" class="breadcrumb-item">Consumer Affairs</a><span class="separator">/</span> <a href="/blog" title="Blog" class="breadcrumb-item">Blog</a> </div> </section> <ul class="post-topics topics-list"> <li> <a href="https://bpi.com/category/capital-stresstesting/">Bank Capital</a> </li> <li> <a href="https://bpi.com/category/capital-stresstesting/basel-finalization/">Basel Finalization</a> </li> <li> <a href="https://bpi.com/category/consumer-affairs/">Consumer Affairs</a> </li> <li> <a href="https://bpi.com/category/consumer-affairs/credit-cards/">Credit and Debit Cards</a> </li> </ul> <div class="post-top-container container-1000"> <h1 class="post-title">Potential Unintended Consequences of a Capital Charge on Unused Credit Card Lines: Curtailed Access to Backup Liquidity and Lower Credit Scores</h1> <div class="post-meta"> <address> <span class="fal fa-user-circle"></span> <a href="https://bpi.com/people/paul-calem/">Paul Calem</a> , <a href="https://bpi.com/people/francisco-covas/">Francisco Covas</a> and <a href="https://bpi.com/people/laura-suhr-plassman/">Laura Suhr Plassman</a> </address> <time datetime="2024-11-13T11:23:29-05:00"> <span class="fal fa-clock"></span> November 13, 2024 </time> <a class="button small purple ghost pill icon print" href="https://bpi.com/wp-content/uploads/2024/11/Potential-Unintended-Consequences-of-a-Capital-Charge-on-Unused-Credit-Card-Lines-Curtailed-Access-to-Backup-Liquidity-and-Lower-Credit-Scores_.pdf" target="_blank"><span class="fal fa-print"></span>Print</a> </div> </div> <div class="container"> <div class="post-content wysiwyg container-1000"> <p>The U.S. banking agencies’ Basel III Endgame package, released in July 2023, introduced a new capital charge for the unused portion of consumer credit card lines. Under the proposed approach, the risk weights applied to drawn balances would be extended to 10 percent of the unused credit line amount. This is referred to as applying a 10-percent “credit conversion factor” or CCF.</p> <p>As argued in previous BPI posts, the 10 percent CCF increases banks’ cost for maintaining infrequently or lightly used credit card lines, and hence incentivizes them to reduce credit limits or possibly close such accounts.<a id="_ftnref1" href="#_ftn1"><sup>[1]</sup></a> Moreover, any resulting line reductions could be detrimental to consumers’ financial well-being, especially those who hold a spare card for backup liquidity, many of whom have low or moderate incomes. Thus, it is encouraging that Federal Reserve Vice Chair for Supervision Michael Barr stated in a recent <a href="https://www.federalreserve.gov/newsevents/speech/barr20240910a.htm" target="_blank" rel="noreferrer noopener">speech</a> that he intends to recommend a reduction in the proposed CCF.<a id="_ftnref2" href="#_ftn2"><sup>[2]</sup></a></p> <p>In this note, we continue our exploration of the proposed CCF’s potential detrimental effects to the well-being of consumers. We focus on two issues: the practical implications for consumers with multiple cards, and the implications for consumers’ credit scores and access to mortgage credit.</p> <p>First, we show that extending risk weights to undrawn credit card balances via the proposed CCF may be particularly detrimental because many consumers hold at least one credit card in reserve for unexpected liquidity needs. More specifically, our analysis shows:</p> <ul class="wp-block-list"> <li>Nearly 3 in 4 consumers with two or more credit cards have overall utilization under 50 percent.</li> <li>These consumers usually maintain at least one card in reserve; for instance, 2 in 3 consumers with two cards keep less than 10 percent of their overall balance on one card.</li> </ul> <p>This uneven distribution of balances makes consumers more vulnerable to line reductions or cancellations.</p> <p>Second, we demonstrate that extending risk weights to undrawn credit card balances via the proposed CCF could harm consumers’ credit scores and access to affordable credit. We quantify this impact through a hypothetical credit line reduction scenario and its effect on consumer credit scores.</p> <p>For this analysis, we rely on a special sample of consumer credit records containing actual and scenario-based credit scores. Our hypothetical scenario assumes that accounts with less than 25 percent utilization would face elimination of half of their unused line amount.</p> <p>The analysis shows significant detrimental effects on credit scores for many consumers. For instance, in the case of consumers without a mortgage, who typically face more credit constraints than homeowners, we find:</p> <ul class="wp-block-list"> <li>Within the population of consumers with low overall utilization rates (25 percent or less), which represents the majority, about one in five would see their credit scores decline by more than 10 points.</li> </ul> <p>Such declines could significantly increase the cost of obtaining a mortgage loan, based on Fannie Mae and Freddie Mac’s origination fee schedules, which specify price tiers in 20-point credit score increments. Moreover, these results are not the worst case. The hypothesized line cuts are modest—for instance, no credit card lines are fully eliminated—yet demonstrate significant potential adverse effects of the proposed CCF on consumers.</p> <p>While such consequences would clearly be undesirable, they might be seen as necessary if the proposed CCF was an appropriate response to the credit risk posed by the unused lines. However, when compared to historical loss data our estimates suggest the proposed CCF is roughly double what historical experience would justify.<a href="#_ftn3" id="_ftnref3"><sup>[3]</sup></a> Moreover, annual stress tests already provide additional protection against this risk through their stress exposure-at-default projections for credit card lines.</p> <p>Since lower credit card utilization rates increase the risk of sizeable credit card line cuts that could harm consumers’ credit scores, the regulatory agencies should consider implementing a sliding scale where the CCF decreases as account utilization rate falls. This approach would better align the regulatory capital requirements with the actual risk while protecting consumer interests.</p> <h2 class="wp-block-heading">Data Source</h2> <p>For this analysis, we use the same dataset as in our previous post on the CCF, which consists primarily of anonymized consumer-level characteristics derived from credit card account data. The dataset was provided by TransUnion, a global information solutions company. TransUnion and its affiliated entities or employees did not sponsor this analysis, nor did they participate in it other than by conducting a scenario exercise with input supplied by BPI, as described below.</p> <p>The dataset contains 1 million observations, each representing a unique, anonymized U.S. consumer with at least one active credit card. This random sample represents approximately 0.5 percent of the U.S. population in TransUnion’s consumer credit database who have an active credit card.</p> <p>The data include consumer-level information on number of credit card accounts, aggregate card balance, and aggregate credit limit as of Feb. 29, 2024, along with estimated income and credit score.  At the individual card account level, the data show current balances for up to five cards per consumer, ordered by decreasing balance.<a href="#_ftn4" id="_ftnref4"><sup>[4]</sup></a></p> <p>In addition, for the same set of up to five individual accounts, the data include 24-month activity histories.<a href="#_ftn5" id="_ftnref5"><sup>[5]</sup></a> The activity history categorizes each consumer’s monthly card activity as Revolver (R), Transactor (T) or Inactive (I). Revolvers carry a balance on the card from month to month, while Transactors (non-revolvers) pay their card balances in full. Consumers who have had no balance or activity on the credit card for a sufficiently long period are reported Inactive for that month.</p> <p>For the analysis of the effects of line reductions on consumer credit scores, TransUnion conducted a rescoring exercise for a random subsample of 100,000 consumers based on a scenario specified by BPI. Specifically, we requested that TransUnion rescore each consumer under a scenario where every account with less than 25 percent utilization receives a 50 percent line reduction.</p> <h2 class="wp-block-heading">Sample Descriptive Statistics</h2> <p>Lower income consumers may face substantial hardship from loss of a reserve credit line in the event of an unexpected expense or income drop, due to the loss of backup liquidity. The distribution of credit card consumers across four income segments of the population—estimated annual incomes of less than or equal to $50,000, $50,000 to $75,000, $75,000 to $100,000 and greater than $100,000—is presented in Figure 1. Close to half of the population with credit cards are in the bottom two income categories.</p> <div class="wp-block-image"> <figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" width="1024" height="1012" src="https://bpi.com/wp-content/uploads/2024/11/fig-1-distribution-of-households-by-income-1024x1012.png" alt="fig 1-distribution of households by income" class="wp-image-50491" style="width:603px;height:auto" srcset="https://bpi.com/wp-content/uploads/2024/11/fig-1-distribution-of-households-by-income-1024x1012.png 1024w, https://bpi.com/wp-content/uploads/2024/11/fig-1-distribution-of-households-by-income-300x297.png 300w, https://bpi.com/wp-content/uploads/2024/11/fig-1-distribution-of-households-by-income-768x759.png 768w, https://bpi.com/wp-content/uploads/2024/11/fig-1-distribution-of-households-by-income-600x593.png 600w, https://bpi.com/wp-content/uploads/2024/11/fig-1-distribution-of-households-by-income.png 1242w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <p>Consumers who have multiple credit card accounts with one or more held in reserve may be more vulnerable to line reductions or cancellations; how commonly this applies is examined in the next section. Figure 2 shows the distribution of the consumer population by number of credit card accounts, within each income segment. The share of the population with a single card declines with income, but even for consumers with incomes below $50,000 it is not quite a majority. The share of the population with two or three cards exhibits less variation by income, comprising 36 percent of consumers with incomes below $50,000, 40 percent of those with incomes above $100,000 and 39 percent within the intermediate income groups.</p> <div class="wp-block-image"> <figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="1024" height="674" src="https://bpi.com/wp-content/uploads/2024/11/fig-2-distribution-of-open-credit-1024x674.png" alt="fig 2-distribution of open credit" class="wp-image-50490" srcset="https://bpi.com/wp-content/uploads/2024/11/fig-2-distribution-of-open-credit-1024x674.png 1024w, https://bpi.com/wp-content/uploads/2024/11/fig-2-distribution-of-open-credit-300x197.png 300w, https://bpi.com/wp-content/uploads/2024/11/fig-2-distribution-of-open-credit-768x505.png 768w, https://bpi.com/wp-content/uploads/2024/11/fig-2-distribution-of-open-credit-1536x1011.png 1536w, https://bpi.com/wp-content/uploads/2024/11/fig-2-distribution-of-open-credit-1600x1053.png 1600w, https://bpi.com/wp-content/uploads/2024/11/fig-2-distribution-of-open-credit-600x395.png 600w, https://bpi.com/wp-content/uploads/2024/11/fig-2-distribution-of-open-credit.png 1954w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <h2 class="wp-block-heading">Consumer Utilization Rates and Allocation of their Balances Across Multiple Cards</h2> <p>The larger the unused portion of a credit card line, the greater the issuer’s cost of maintaining that line under a regulatory capital charge on unused balances. The smaller the card balance, the lower the fee or interest income for the issuer. Consequently, under the proposed new capital charge, issuers’ incentives to close accounts or reduce credit limits will be strongest for low-utilization accounts.</p> <p>While our data show each consumer’s overall utilization rate but not that of each individual account, lower overall utilization implies lower utilization of one or more individual accounts and a greater likelihood that the consumer will be subject to credit card line reductions. Table 1 shows the distribution of consumers in our sample across utilization rate segments—less than 25, between 25 and 50, between 50 and 75 and greater than 75 percent—for consumers with one, two, three and four or more accounts, respectively and for the full population.</p> <p>Most consumers utilize less than a quarter of their total credit line, regardless of the number of cards held. Two in three consumers with one account, and three in four with two or more accounts have overall utilization rates below 50 percent. Therefore, most consumers have at least one low-utilization credit card account. Moreover, as demonstrated in Appendix 1, even within the population with estimated incomes less than $75,000, most have utilization rates below 50 percent. The proposed CCF will increase banks’ costs of offering these less utilized credit lines, implying that most consumers, including many low- or moderate-income consumers, could face substantial line reductions under the proposed rule.<a href="#_ftn6" id="_ftnref6"><sup>[6]</sup></a></p> <p class="has-text-align-center">Table 1: Distribution of consumer utilization rates, by number of credit card accounts</p> <figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="255" src="https://bpi.com/wp-content/uploads/2024/11/table-1-dist-of-consumer-1024x255.png" alt="" class="wp-image-50477" srcset="https://bpi.com/wp-content/uploads/2024/11/table-1-dist-of-consumer-1024x255.png 1024w, https://bpi.com/wp-content/uploads/2024/11/table-1-dist-of-consumer-300x75.png 300w, https://bpi.com/wp-content/uploads/2024/11/table-1-dist-of-consumer-768x191.png 768w, https://bpi.com/wp-content/uploads/2024/11/table-1-dist-of-consumer-600x150.png 600w, https://bpi.com/wp-content/uploads/2024/11/table-1-dist-of-consumer.png 1513w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure> <p>An additional relevant consideration is how consumers with multiple credit cards and low utilization distribute their balances. A more skewed balance distribution could increase their likelihood of facing line reductions.</p> <p>For instance, if a consumer spreads balances evenly across two accounts, each account may have sufficient utilization to minimize the risk for line cuts. However, if the consumer uses one card for most expenses while keeping another for emergencies or occasional purchases, the second credit card faces a greater risk of having its credit line reduced or canceled.</p> <p>Figure 3 shows how consumers with low utilization (less than 50 percent overall) and two credit card accounts allocate their balances. We focus on lower-utilization consumers because those with higher overall utilization rates would be unlikely to face line cuts. For brevity, we examine only consumers with two cards—analysis of consumers with more than two cards is presented in Appendix 2.</p> <p>As shown in the chart, these consumers typically rely on a single card. Three in four such consumers hold 80 percent or more of their total balances on one card, and nearly three in five hold 95 percent or more on one card.</p> <p>Thus, we find that consumers with two cards tend to allocate their balances unevenly, typically holding the second card as a low-balance account. As documented in the appendix, consumers with three cards, and those with four or more cards also tend to maintain at least one low-balance card when their overall utilization is less than 50 percent.</p> <p>The proposed new risk weight on the unused portion of the credit line would make these consumers vulnerable to substantial reductions or complete closure of their low-balance credit lines, potentially harming their longer-term financial health.</p> <div class="wp-block-image"> <figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" width="1024" height="690" src="https://bpi.com/wp-content/uploads/2024/11/fig-3-consumers-allocation--1024x690.png" alt="fig 3-consumers allocation" class="wp-image-50489" style="width:844px;height:auto" srcset="https://bpi.com/wp-content/uploads/2024/11/fig-3-consumers-allocation--1024x690.png 1024w, https://bpi.com/wp-content/uploads/2024/11/fig-3-consumers-allocation--300x202.png 300w, https://bpi.com/wp-content/uploads/2024/11/fig-3-consumers-allocation--768x518.png 768w, https://bpi.com/wp-content/uploads/2024/11/fig-3-consumers-allocation--1536x1035.png 1536w, https://bpi.com/wp-content/uploads/2024/11/fig-3-consumers-allocation--1600x1079.png 1600w, https://bpi.com/wp-content/uploads/2024/11/fig-3-consumers-allocation--600x404.png 600w, https://bpi.com/wp-content/uploads/2024/11/fig-3-consumers-allocation-.png 1890w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <h2 class="wp-block-heading">Potential Effects on Credit Scores and Access to Mortgage Credit</h2> <p>Aside from a direct effect on consumers’ available credit, reduced credit card limits will raise the calculated utilization rates for affected individuals. This will affect their credit scores, as utilization rates are a factor included in credit scoring models. In general, higher credit card utilization rates lower an individual’s credit score, with the magnitude depending on their other credit characteristics.</p> <p>As noted, TransUnion conducted a rescoring exercise on our behalf for a random subsample of consumers.<a href="#_ftn7" id="_ftnref7"><sup>[7]</sup></a> The hypothetical scenario assumed a 50 percent line reduction for every credit card account with less than 25 percent utilization. We then quantified the resulting changes in consumer credit scores.</p> <p>For brevity, our discussion focuses on consumers without a mortgage, who are primarily non-homeowners. This population is particularly vulnerable to the consequences of increased utilization rates, as even modest credit score declines can affect their cost of obtaining a mortgage. Appendix 3 examines consumers with a mortgage, who show somewhat smaller declines than those without mortgages.</p> <p>Since consumers with lower overall utilization rates would face larger credit line reductions under our specified scenario, implying larger effects on credit scores, we segment the analysis by overall utilization rate. Table 2 shows the distribution of consumers across utilization rate segments: less than 10 percent; between 10 and 25 percent; between 25 and 50 percent; and greater than 50 percent, distinguishing between consumers with and without a mortgage. Regardless of mortgage status, most consumers utilize less than a quarter of their total credit line, though non-mortgage holders are somewhat more concentrated in the above-50-percent utilization segment.</p> <p class="has-text-align-center">Table 2: Distribution of consumer utilization rates by mortgage status</p> <div class="wp-block-image"> <figure class="aligncenter size-large"><img loading="lazy" decoding="async" width="1024" height="479" src="https://bpi.com/wp-content/uploads/2024/11/table-2-distribution-of-consumer-1024x479.png" alt="table 2-distribution of consumer" class="wp-image-50488" srcset="https://bpi.com/wp-content/uploads/2024/11/table-2-distribution-of-consumer-1024x479.png 1024w, https://bpi.com/wp-content/uploads/2024/11/table-2-distribution-of-consumer-300x140.png 300w, https://bpi.com/wp-content/uploads/2024/11/table-2-distribution-of-consumer-768x359.png 768w, https://bpi.com/wp-content/uploads/2024/11/table-2-distribution-of-consumer-1536x719.png 1536w, https://bpi.com/wp-content/uploads/2024/11/table-2-distribution-of-consumer-1600x749.png 1600w, https://bpi.com/wp-content/uploads/2024/11/table-2-distribution-of-consumer-600x281.png 600w, https://bpi.com/wp-content/uploads/2024/11/table-2-distribution-of-consumer.png 1966w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <p>Figure 4 depicts the effect of the scenario on consumers who have very low overall utilization rates (under 10 percent) at the outset. Nearly one in five would experience a credit score decline greater than 10 points, while about half would have negligible change (no greater than a 5-point drop).</p> <p>Figure 5 repeats this analysis for consumers with utilization rates between 10 and 25 percent. The outcome is marginally worse for this population, as more than one in five would see their credit score drop by 10 points or more, and about one in 10 would see a decline of at least 15 points.</p> <p>These changes in credit scores are sizeable enough to affect the cost of mortgage borrowing for many potential mortgage borrowers. For instance, according to Freddie Mac’s <a href="https://guide.freddiemac.com/euf/assets/pdfs/Exhibit_19.pdf" target="_blank" rel="noreferrer noopener">Credit Fee Matrix</a> (also known as Exhibit 19), each 20-point increment in credit score between 640 and 780 is associated with an increase of a quarter percent or more in the upfront fee (depending on the loan-to-value ratio and loan purpose) paid by loan originators for Freddie Mac’s credit guarantee.</p> <div class="wp-block-image"> <figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" width="1024" height="671" src="https://bpi.com/wp-content/uploads/2024/11/fig-4-dist-of-consumer-by-change-in-credit-score-1024x671.png" alt="fig 4-dist of consumer by change in credit score" class="wp-image-50487" style="width:884px;height:auto" srcset="https://bpi.com/wp-content/uploads/2024/11/fig-4-dist-of-consumer-by-change-in-credit-score-1024x671.png 1024w, https://bpi.com/wp-content/uploads/2024/11/fig-4-dist-of-consumer-by-change-in-credit-score-300x197.png 300w, https://bpi.com/wp-content/uploads/2024/11/fig-4-dist-of-consumer-by-change-in-credit-score-768x503.png 768w, https://bpi.com/wp-content/uploads/2024/11/fig-4-dist-of-consumer-by-change-in-credit-score-1536x1007.png 1536w, https://bpi.com/wp-content/uploads/2024/11/fig-4-dist-of-consumer-by-change-in-credit-score-1600x1048.png 1600w, https://bpi.com/wp-content/uploads/2024/11/fig-4-dist-of-consumer-by-change-in-credit-score-600x393.png 600w, https://bpi.com/wp-content/uploads/2024/11/fig-4-dist-of-consumer-by-change-in-credit-score.png 1758w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <div class="wp-block-image"> <figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" width="1024" height="667" src="https://bpi.com/wp-content/uploads/2024/11/fig-5-dist-of-consumer-credit-score-1024x667.png" alt="fig 5-dist of consumer credit score" class="wp-image-50486" style="width:866px;height:auto" srcset="https://bpi.com/wp-content/uploads/2024/11/fig-5-dist-of-consumer-credit-score-1024x667.png 1024w, https://bpi.com/wp-content/uploads/2024/11/fig-5-dist-of-consumer-credit-score-300x196.png 300w, https://bpi.com/wp-content/uploads/2024/11/fig-5-dist-of-consumer-credit-score-768x501.png 768w, https://bpi.com/wp-content/uploads/2024/11/fig-5-dist-of-consumer-credit-score-1536x1001.png 1536w, https://bpi.com/wp-content/uploads/2024/11/fig-5-dist-of-consumer-credit-score-1600x1043.png 1600w, https://bpi.com/wp-content/uploads/2024/11/fig-5-dist-of-consumer-credit-score-600x391.png 600w, https://bpi.com/wp-content/uploads/2024/11/fig-5-dist-of-consumer-credit-score.png 1838w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <p>Finally, Figure 6 presents results for consumers with overall utilization rates between 25 and 50 percent. Only 13 percent of these consumers see credit score declines of 10 points or more, while more than 70 percent see negligible change. This demonstrates that credit score effects dissipate as consumer utilization rates exceed 25 percent.<a href="#_ftn8" id="_ftnref8"><sup>[8]</sup></a></p> <p>It is worth reiterating that the proposed capital charge conceivably could result in curtailment of credit lines beyond what the scenario posits, such as full cancellation of zero-balance accounts. Therefore, our scenario analysis may understate the potential adverse effects of the proposed rule on consumer credit scores.</p> <div class="wp-block-image"> <figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" width="1024" height="652" src="https://bpi.com/wp-content/uploads/2024/11/fig-6-dist-of-consumer-credit-score-1024x652.png" alt="fig 6-dist of consumer credit score" class="wp-image-50485" style="width:862px;height:auto" srcset="https://bpi.com/wp-content/uploads/2024/11/fig-6-dist-of-consumer-credit-score-1024x652.png 1024w, https://bpi.com/wp-content/uploads/2024/11/fig-6-dist-of-consumer-credit-score-300x191.png 300w, https://bpi.com/wp-content/uploads/2024/11/fig-6-dist-of-consumer-credit-score-768x489.png 768w, https://bpi.com/wp-content/uploads/2024/11/fig-6-dist-of-consumer-credit-score-1536x978.png 1536w, https://bpi.com/wp-content/uploads/2024/11/fig-6-dist-of-consumer-credit-score-1600x1018.png 1600w, https://bpi.com/wp-content/uploads/2024/11/fig-6-dist-of-consumer-credit-score-600x382.png 600w, https://bpi.com/wp-content/uploads/2024/11/fig-6-dist-of-consumer-credit-score.png 1832w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <h2 class="wp-block-heading">Conclusion</h2> <p>This note examines two key issues raised by the Basel III Endgame proposal’s new capital charge on unused credit card lines: the practical implications for consumers with multiple cards, and the implications for consumers’ credit scores and access to mortgage credit.</p> <p>We find that consumers with two or more credit cards tend to hold at least one in reserve, making them vulnerable to line reductions or cancellations targeting their low-balance cards. This could harm the financial well-being of these consumers, especially those with low or moderate incomes.</p> <p>In addition, we quantify the effect of hypothetical line reductions on consumer credit scores. A significant share of consumers with low overall utilization rates (below 25 percent) would see drops in their credit score that could significantly affect their cost of obtaining a mortgage loan.</p> <p>These findings suggest that consumers may face material adverse consequences from the proposed CCF. Of course, these consequences might be seen as necessary if the proposed CCF was an appropriate response to the credit risk posed by the unused lines. However, as argued in the previous posts, the proposed CCF is well above what might be rationalized on the basis of historical loss experience. Given that fact, and because the risk for sizeable line cuts with material effects on credit scores rises as utilization rates decline, we recommend that the agencies consider incremental reductions in the CCF as utilization declines below 50 percent.</p> <p>Our analysis relies on a hypothesized scenario where accounts with less than 25 percent utilization face credit limit reductions eliminating half of their unused line amount. However, the proposed capital charge could lead to more severe effects, including the cancellation of zero-balance accounts. Therefore, the actual effects on consumer credit scores could be substantially more severe than depicted here.</p> <h2 class="wp-block-heading">Appendix 1: Utilization Rates and Allocation of Balances Across Multiple Cards for Lower-Income Consumers</h2> <p>The Table below shows the distribution of lower-income consumers (estimated income less than $75,000) across utilization rate segments—less than 25, between 25 and 50, between 50 and 75 and greater than 75 percent—for consumers with one, two, three and four or more accounts, respectively and for the full population. Nearly half of this population utilizes less than a quarter of their total credit line, and three out of five have overall utilization rates below 50 percent.</p> <p class="has-text-align-center">Distribution of consumer utilization rates, by number of credit card accounts</p> <figure class="wp-block-image size-large"><img loading="lazy" decoding="async" width="1024" height="300" src="https://bpi.com/wp-content/uploads/2024/11/table-dist-of-consumer-1024x300.png" alt="table-dist of consumer" class="wp-image-50478" srcset="https://bpi.com/wp-content/uploads/2024/11/table-dist-of-consumer-1024x300.png 1024w, https://bpi.com/wp-content/uploads/2024/11/table-dist-of-consumer-300x88.png 300w, https://bpi.com/wp-content/uploads/2024/11/table-dist-of-consumer-768x225.png 768w, https://bpi.com/wp-content/uploads/2024/11/table-dist-of-consumer-1536x450.png 1536w, https://bpi.com/wp-content/uploads/2024/11/table-dist-of-consumer-1600x468.png 1600w, https://bpi.com/wp-content/uploads/2024/11/table-dist-of-consumer-600x176.png 600w, https://bpi.com/wp-content/uploads/2024/11/table-dist-of-consumer.png 1626w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure> <h2 class="wp-block-heading">Appendix 2: More on Allocation of Card Balances Across Multiple Cards</h2> <p>As seen in the charts below, consumers with three cards and those with four or more cards typically hold a very small share of their total balances on their lowest-balance cards. Close to 90 percent of consumers with three cards hold 90 percent or more of their total balances on two of their cards. More than 90 percent of consumers with four or more cards hold more than four-fifths of their balances on three cards.</p> <div class="wp-block-image"> <figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" width="1024" height="743" src="https://bpi.com/wp-content/uploads/2024/11/app-2-consumer-allocation-1024x743.png" alt="app 2 -consumer allocation" class="wp-image-50483" style="width:852px;height:auto" srcset="https://bpi.com/wp-content/uploads/2024/11/app-2-consumer-allocation-1024x743.png 1024w, https://bpi.com/wp-content/uploads/2024/11/app-2-consumer-allocation-300x218.png 300w, https://bpi.com/wp-content/uploads/2024/11/app-2-consumer-allocation-768x557.png 768w, https://bpi.com/wp-content/uploads/2024/11/app-2-consumer-allocation-1536x1114.png 1536w, https://bpi.com/wp-content/uploads/2024/11/app-2-consumer-allocation-1600x1160.png 1600w, https://bpi.com/wp-content/uploads/2024/11/app-2-consumer-allocation-600x435.png 600w, https://bpi.com/wp-content/uploads/2024/11/app-2-consumer-allocation.png 1820w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <div class="wp-block-image"> <figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" width="1024" height="713" src="https://bpi.com/wp-content/uploads/2024/11/app-2b-consumer-allocation-1024x713.png" alt="app 2b- consumer allocation" class="wp-image-50482" style="width:872px;height:auto" srcset="https://bpi.com/wp-content/uploads/2024/11/app-2b-consumer-allocation-1024x713.png 1024w, https://bpi.com/wp-content/uploads/2024/11/app-2b-consumer-allocation-300x209.png 300w, https://bpi.com/wp-content/uploads/2024/11/app-2b-consumer-allocation-768x535.png 768w, https://bpi.com/wp-content/uploads/2024/11/app-2b-consumer-allocation-1536x1070.png 1536w, https://bpi.com/wp-content/uploads/2024/11/app-2b-consumer-allocation-1600x1115.png 1600w, https://bpi.com/wp-content/uploads/2024/11/app-2b-consumer-allocation-600x418.png 600w, https://bpi.com/wp-content/uploads/2024/11/app-2b-consumer-allocation.png 1860w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <h2 class="wp-block-heading">Appendix 3: Scenario Results For Consumers with Mortgages</h2> <p>As seen in the charts below, among consumers with a mortgage the proportion of consumers seeing a decline in their credit score greater than 10 percentage points is somewhat smaller than in the case of consumers without mortgages. For instance, for the segment with overall utilization less than 10 percent, 10.7 percent of consumers with a mortgage have a credit score decline of this magnitude, compared to the 18.7 percent of consumers without a mortgage from Figure 4 above.</p> <div class="wp-block-image"> <figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" width="1024" height="671" src="https://bpi.com/wp-content/uploads/2024/11/app-3-dist-of-consumers-1024x671.png" alt="app 3-dist of consumers" class="wp-image-50481" style="width:842px;height:auto" srcset="https://bpi.com/wp-content/uploads/2024/11/app-3-dist-of-consumers-1024x671.png 1024w, https://bpi.com/wp-content/uploads/2024/11/app-3-dist-of-consumers-300x196.png 300w, https://bpi.com/wp-content/uploads/2024/11/app-3-dist-of-consumers-768x503.png 768w, https://bpi.com/wp-content/uploads/2024/11/app-3-dist-of-consumers-1536x1006.png 1536w, https://bpi.com/wp-content/uploads/2024/11/app-3-dist-of-consumers-1600x1048.png 1600w, https://bpi.com/wp-content/uploads/2024/11/app-3-dist-of-consumers-600x393.png 600w, https://bpi.com/wp-content/uploads/2024/11/app-3-dist-of-consumers.png 2046w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <div class="wp-block-image"> <figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" width="1024" height="689" src="https://bpi.com/wp-content/uploads/2024/11/app-3b-dist-of-consumers-1024x689.png" alt="app 3b-dist of consumers" class="wp-image-50480" style="width:848px;height:auto" srcset="https://bpi.com/wp-content/uploads/2024/11/app-3b-dist-of-consumers-1024x689.png 1024w, https://bpi.com/wp-content/uploads/2024/11/app-3b-dist-of-consumers-300x202.png 300w, https://bpi.com/wp-content/uploads/2024/11/app-3b-dist-of-consumers-768x517.png 768w, https://bpi.com/wp-content/uploads/2024/11/app-3b-dist-of-consumers-1536x1034.png 1536w, https://bpi.com/wp-content/uploads/2024/11/app-3b-dist-of-consumers-1600x1077.png 1600w, https://bpi.com/wp-content/uploads/2024/11/app-3b-dist-of-consumers-600x404.png 600w, https://bpi.com/wp-content/uploads/2024/11/app-3b-dist-of-consumers.png 2030w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <div class="wp-block-image"> <figure class="aligncenter size-large is-resized"><img loading="lazy" decoding="async" width="1024" height="666" src="https://bpi.com/wp-content/uploads/2024/11/app-3c-dist-of-consumers-1024x666.png" alt="app 3c-dist of consumers" class="wp-image-50479" style="width:848px;height:auto" srcset="https://bpi.com/wp-content/uploads/2024/11/app-3c-dist-of-consumers-1024x666.png 1024w, https://bpi.com/wp-content/uploads/2024/11/app-3c-dist-of-consumers-300x195.png 300w, https://bpi.com/wp-content/uploads/2024/11/app-3c-dist-of-consumers-768x500.png 768w, https://bpi.com/wp-content/uploads/2024/11/app-3c-dist-of-consumers-1536x999.png 1536w, https://bpi.com/wp-content/uploads/2024/11/app-3c-dist-of-consumers-1600x1041.png 1600w, https://bpi.com/wp-content/uploads/2024/11/app-3c-dist-of-consumers-600x390.png 600w, https://bpi.com/wp-content/uploads/2024/11/app-3c-dist-of-consumers.png 2038w" sizes="auto, (max-width: 1024px) 100vw, 1024px" /></figure></div> <div style="height:47px" aria-hidden="true" class="wp-block-spacer"></div> <div data-wp-interactive="core/file" class="wp-block-file aligncenter"><object data-wp-bind--hidden="!state.hasPdfPreview" hidden class="wp-block-file__embed" data="https://bpi.com/wp-content/uploads/2024/11/Potential-Unintended-Consequences-of-a-Capital-Charge-on-Unused-Credit-Card-Lines-Curtailed-Access-to-Backup-Liquidity-and-Lower-Credit-Scores_.pdf" type="application/pdf" style="width:100%;height:600px" aria-label="Embed of Potential Unintended Consequences of a Capital Charge on Unused Credit Card Lines--Curtailed Access to Backup Liquidity and Lower Credit Scores_."></object><a id="wp-block-file--media-8324997e-5645-4a50-bbb3-87152f9f955e" href="https://bpi.com/wp-content/uploads/2024/11/Potential-Unintended-Consequences-of-a-Capital-Charge-on-Unused-Credit-Card-Lines-Curtailed-Access-to-Backup-Liquidity-and-Lower-Credit-Scores_.pdf">Potential Unintended Consequences of a Capital Charge on Unused Credit Card Lines–Curtailed Access to Backup Liquidity and Lower Credit Scores_</a><a href="https://bpi.com/wp-content/uploads/2024/11/Potential-Unintended-Consequences-of-a-Capital-Charge-on-Unused-Credit-Card-Lines-Curtailed-Access-to-Backup-Liquidity-and-Lower-Credit-Scores_.pdf" class="wp-block-file__button wp-element-button" download aria-describedby="wp-block-file--media-8324997e-5645-4a50-bbb3-87152f9f955e">Download</a></div> <div style="height:50px" aria-hidden="true" class="wp-block-spacer"></div> <hr class="wp-block-separator has-alpha-channel-opacity"/> <div style="height:31px" aria-hidden="true" class="wp-block-spacer"></div> <p><a id="_ftn1" href="#_ftnref1">[1]</a> See “<a href="https://bpi.com/the-basel-proposal-what-it-means-for-retail-lending/" target="_blank" rel="noreferrer noopener">The Basel Proposal: What It Means for Retail Lending</a>” (November 2023) and “<a href="https://bpi.com/potential-adverse-effects-of-the-basel-iii-capital-proposal-on-consumer-credit-card-lines/" target="_blank" rel="noreferrer noopener">Potential Adverse Effects of the Basel III Capital Proposal on Retail Credit Card Lines</a>. (June 2024).</p> <p><a href="#_ftnref2" id="_ftn2">[2]</a> More precisely, the Vice Chairman stated that he intends to recommend reducing “the capital requirements for credit card exposures where the borrower uses only a small portion of the commitment line,” presumably by reducing the proposed CCF.</p> <p><a href="#_ftnref3" id="_ftn3">[3]</a> See the previous blog posts cited above for details.</p> <p><a href="#_ftnref4" id="_ftn4">[4]</a> Individual card balances are provided for the card with the highest current balance, the card with the second highest balance and so on up to five cards.</p> <p><a href="#_ftnref5" id="_ftn5">[5]</a> Individual activity histories are provided for the card with the highest current balance, the card with the second highest balance and so on up to five cards.</p> <p><a href="#_ftnref6" id="_ftn6">[6]</a> In the population as a whole, about 23 percent of consumers have just two card accounts and 16 percent have three, with the rest equally divided between those with a single card and those with four or more.</p> <p><a href="#_ftnref7" id="_ftn7">[7]</a> TransUnion conducted the rescoring exercise using proprietary credit scoring algorithm and proprietary account level data including account level credit limits.</p> <p><a href="#_ftnref8" id="_ftn8">[8]</a> Consumers with low overall utilization rates tend to carry non-revolving balances on their lower-balance cards, which are most vulnerable to credit line reductions. For example, among consumers who carry revolving balance on their lowest-balance credit card, only 15 percent have overall utilization rates below 50 percent. In contrast, 65 percent of consumers who do not carry revolving balances maintain utilization rates below 50 percent. 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