Credit card issuers are offering consumers fewer new cards and cutting credit limits. Overstock.com and Buy.com are among the online retailers offering additional ways to pay so that customers can complete their purchases.
There is ample evidence that fewer consumers will be able to buy with credit cards. Nearly 60% of credit card issuers reported tightening lending in October, according to the latest survey by the Federal Reserve Board. Synovate Mail Monitor predicts credit card solicitations will decline 20% this year, with most of the decline being in offers to households making less than $50,000 a year. And brokerage firm Oppenheimer & Co. predicted in a recent report that U.S. credit card issuers will reduce credit lines by an additional $2 trillion in the next 18 months, reducing consumers’ credit card borrowing capacity by nearly 45%.
There are some signs that tighter credit is already taking hold. Online discount retailer Overstock.com, No. 30 in the Internet Retailer Top 500 Guide, has seen the rate of credit card declines increase slightly in recent months to 3%, says Patrick Byrne, chairman and CEO. Credit cards account for 51% of purchases at Overstock.com, he says.
Overstock.com has added online payment service PayPal as well as Bill Me Later, an alternative way to pay that allows consumers to defer payments, often for 90 days. In addition, Byrne says the retailer has completed a project that will make it easier for it to add payment methods in the future, although he says there are no immediate plans for adding further options. EBay, which owns PayPal, acquired Bill Me Later last year.
Buy.com, No. 33 in the Internet Retailer Top 500 Guide, has not seen any significant decrease in the rate of credit cards being turned down, but has seen some signs that shoppers are adjusting to having less credit, says Jeff Wisot, vice president of marketing. He says the online retailer noticed in the recent holiday season more consumers splitting up purchases among several cards, instead of charging a large amount to one card, and shopping for off brands that cost less.
In addition, he says, more Buy.com shoppers are using alternative payment methods. While he could not offer details, he says credit card spending at Buy.com was up during the recent holiday season, but the 40% increase in holiday sales that Buy.com reported Dec. 17 included a considerable increase in purchases with alternative payment methods. Buy.com, which previously offered PayPal, has in the past year added eBillme—which enables consumers to make online purchases through bank bill-pay systems—as well as the deferred-payment methods Bill Me Later and PayPal Pay Later.
Wisot says he’s noticed small businesses in particular are turning to the methods that allow them to defer payment. “Whereas before they would put it on credit cards and pay within 30 days, now more of these people are trying to get the longer terms like 90 days,” he says.
Wisot says he has not seen any decrease in the approval rate on deferred-payment products like Bill Me Later and PayPal Pay Later, which run an instant credit check on a customer applying to put off payment. However, approval rates on all kinds of consumer credit are likely to go down as credit card issuers cancel cards and lower credit limits, says payment consultant Allen Weinberg of Glenbrook Partners.
That’s because the FICO scores credit bureaus use to determine credit risk are partly based on the percentage of available credit a consumer has used, and that percentage will go up as credit card limits are cut or cards canceled, he says. “Part of the slightly hidden effect of issuers lowering credit lines is the percentage of credit line used goes up and that lowers a consumer’s FICO score, even if the consumer doesn’t do anything,” Weinberg says. A FICO score, which is named after a credit-scoring system developed by Fair Isaac Corp., figures a consumer's credit rating with information including the consumer's level of debt and credit history.
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