New Bank Capital Rules May Pressure Credit Access for Paycheck-to-Paycheck Consumers

Consumers are borrowing more on their credit cards — just to pay the monthly bills.

And as financially struggling consumers move toward hitting their spending limits and might look for new cards or to increase limits, looming new capital rules for banks may mean that financial institutions will pull back on existing credit limits, or rein in issuing new cards in the first place. The ripple effect is that  there’s less credit available to these consumers.

Back in July of last year, U.S. regulators issued new proposals, known as Basel III Endgame, which among many other things would increase the amount of capital banks have to hold on their balance sheets. For banks, the implementation of those new rules acts as a “charge” on unused credit lines. The more capital that’s held in house, so to speak, the less money there is to put to work into the broader economy.

That means the banks receive less of a return on their money, which in turn may spur them to charge higher rates on credit that is extended.

The actual boost to the capital requirements has yet to be determined: In September, the Federal Reserve put the increase at 9%, where that increase — aimed at larger banks — would have been around 19% per the initial proposal.

But there’s also a credit conversion factor (CCF), on unused credit lines, which would be increased by 10% and which would further increase the capital that needs to be held. The logic follows that banks would reduce their exposure to the CCF by reducing the unused credit lines (and thus the carrying cost of that credit).

In analysis emailed to PYMNTS, the Bank Policy Institute has estimated that consumers who have multiple credit card accounts, and have “one or more held in reserve” may be vulnerable to those credit line reductions or cancellations. That would happen, too, with cards that are unused or have lower utilization — the cards that are held in reserve to meet emergency expenses. Credit scores might actually decline given the fact that higher utilization rates (as lines decrease) lead to lower rates.

Separately, PYMNTS Intelligence noted Friday (Nov. 15) that the percentage of consumers living paycheck to paycheck has hit 67%, and the vast majority of consumers meeting their expenses month to month carry credit card balances. More than 83% of consumers living paycheck to paycheck without issues paying their bills carry balances; more than 90% of individuals who live paycheck to paycheck and do have issues meeting their expenses carry card debt.

We found financially struggling consumers are the most likely to have an outstanding balance in the first place, but their average balances are higher. The average outstanding balance among paycheck-to-paycheck cardholders who have difficulties paying their bills is $7,038. Paycheck-to-paycheck individuals without such difficulties averaged an outstanding balance of $5,766.

Twenty-five percent of all respondents said their outstanding balance increased over the last year, while 55% said it stayed about the same. Among cardholders living paycheck to paycheck with issues paying bills, 34% said their outstanding balances increased.

The average card limit for cardholders living paycheck to paycheck with issues paying their bills is $4,965 — indicating that they have several cards on hand (and may be nearing limits on several of them).  Indeed, at the end of 2023, PYMNTS Intelligence found that 57% of all cards were held by paycheck-to-paycheck individuals; they own two cards on average, per the report.

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