The Pandemic May Have Made Credit Cards Better

Consumers should look forward to more rewarding card offers in 2021

Woman smiles at credit card while sitting in front of a laptop
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Like so many things, the credit card industry went through a pandemic-driven upheaval in 2020. But while the economic turmoil hurt many cardholders, it also brought positive changes to the cards in their wallets, opening the door for lower rates, more rewards, and innovative products. 

Early this year, the Federal Reserve imposed emergency interest rate cuts, and banks tightened lending standards as the pandemic rocked the economy. Fortunately, while issuers dialed back promotional card offers, they also extended a helping hand to consumers in the form of payment deferrals and limited-time rewards offers.

Key Takeaways

  • The average credit card interest rate is steadily holding below pre-pandemic levels, which should continue as the Fed keeps borrowing costs low through the coming year and beyond.   
  • Lending standards have made it tough for consumers with poor credit to qualify for new cards, but they may loosen by mid-2021.
  • Many travel cards added extra ways to earn rewards while at home this year, potentially changing those rewards programs for the long haul.
  • Financial technology firms entered the credit card market with inventive products tailored to specific demographics, such as people with low credit scores and fans of cryptocurrencies.

Many of those offers were expanded, and some are rolling into the new year, bringing cardholders more rewards-earning options in the months ahead. In fact, as banks continue adapting to new consumer spending habits, many of these benefits may be here to stay, experts say.

“I think this year proved that a recession doesn’t hurt credit card rewards, and I would not have thought that before,” said Mosche Orenbuch, an analyst with financial research group Credit Suisse. “If issuers could be adding to your rewards during a period in which we saw 15% unemployment, that means that the issuers are just going to keep adding value.”

Interest Rates Rapidly Fell Below Pre-Pandemic Highs

COVID-19 was quick to impact credit cards this year, and more specifically, interest rates. The Fed made two emergency rate cuts in March to make credit more affordable for companies who needed easy access to additional funds during the pandemic. The targeted range for the fed funds rate, which also drives the prime rate that variable credit card APRs are based on, fell from 1.50%-1.75% to where it now rests at 0%-0.25%. It’s only been this low during one other period in history, between 2008 and 2015, following the last recession.

Credit card issuers responded to the Fed’s actions fast, and The Balance recorded consistent APR cuts for several weeks. But after that, few card issuers made APR changes, which helped keep the average card APR near the 20% mark for the last three quarters of the year. As of publication date, the average credit card interest rate is 20.20%.

What This Means For You Next Year

Carrying credit card debt may be slightly less costly than it was in prior years, but it’s still very expensive, so use this time to focus on debt repayment if you can. When the Fed starts to raise its benchmark rate again, credit card APRs will rise with it. However, that shouldn’t happen for a while.

“At this point, there is no sign that the Fed is going to do anything anytime soon,” said Scott Hoyt, head of consumer economic research at Moody’s Analytics. “We are expecting growth to accelerate in the second half of next year, but we still need a lot of growth to get back to normal levels of employment and spending activity.”

During its December meeting, the Fed promised to continue supporting the economy as it recovers from the pandemic. The central bank plans to leave the benchmark rate at virtually zero until inflation is “moderately above” 2% and employment has fully recovered—at least through 2023.

A steady federal funds rate means your credit card APR won’t rise without warning. Card issuers are required to notify customers at least 45 days before making rate changes that aren’t tied to an index like the prime rate. So if your card issuer decides to tweak its APRs for another reason, you’ll be notified before the change hits your account.

Card Issuers Tightened Lending Standards 

When times are tough, banks brace for potentially greater financial losses and consumer defaults by being stricter when it comes to new account approvals, among other things. This practice, referred to as tightening, kicked into high gear during the height of the pandemic in 2020. 

By the end of the third quarter, almost three-quarters (about 72%) of banks surveyed by the Federal Reserve said they had tightened lending standards—more than ever before, including during the 2008 recession. Throughout 2020, many banks reported raising minimum credit score requirements for new applicants, and over the summer, some even lowered the credit limits of existing cardholders.

The credit card application rejection rate reached 21.3% in October, the highest reported level since June 2018 and a drastic 119% increase from February 2020.

A retreat from 0% balance transfer offers were one of the most visible signs that card issuers were worried about risk this year. For example, American Express pulled balance transfer offers from all its cards in June, and told The Balance it was managing risks for consumers and the company. Citi also cut back two of the longest 0% balance transfer offers on the market.

What This Means For You Next Year

If you have less-than-perfect credit, opening a new card or qualifying for a standout APR deal may be tough for a while longer. Based on the latest Fed survey, nearly 27% of card-issuing banks are still upholding tighter lending standards. While that’s quite an improvement in just a few months, it’s still well above pre-pandemic levels. 

“At this very moment, issuers are probably erring on the conservative side,” said Credit Suisse’s Orenbuch. “Nobody wants to see a bunch of payment defaults right before things get better. I would say we would be looking for still muted marketing as we enter the year, and then it should pick up as the year goes on.”

The TransUnion 2021 consumer credit forecast released in early December projected that as long as key economic indicators such as unemployment statistics and gross domestic product (GDP) continue improving, banks will loosen up and approve more credit card applications, especially by the end of the second quarter. The credit bureau expects lenders will still be cautious, but if severe account delinquencies remain low, even consumers with so-so credit may have a better shot at getting a new credit card. 

Pandemic-Related Payment Deferrals Reduced Bankruptcies 

Despite the pandemic, consumers were able to really keep debt in check. In fact, the number of new bankruptcies hit a historic low this fall and were down 35% compared to the end of 2019, according to the latest household debt and credit report from the Federal Reserve Bank of New York. 

With credit card accounts specifically, fewer consumer accounts have tipped into serious delinquency territory this year compared to last. Several major card issuers, including American Express and Chase, noted lower card account delinquency rates in their latest earnings reports, too. The overall delinquency rate, which indicates how many loan accounts are seriously past-due, is also below pre-pandemic levels. This positive trend is largely credited to the financial relief measures offered by the CARES Act and lenders this year, which have helped keep consumers from falling behind—at least for the time being.

The country is also in a better place with credit card debt than it was before the pandemic. The U.S. revolving debt balance (which largely represents credit card balances) has fallen seven times in the past eight months, and is now at the lowest level since May 2017. 

The average credit utilization ratio has dipped along with card balances, according to the 2020 Experian State of Credit report. It’s now 26%, down from 30% in 2019. That’s an important FICO credit score determinant, and yet another sign that consumers have been keeping card use in check.

What This Means for You Next Year

If these trends continue, opening a new card account may be easier in 2021. Lenders want to see signs that consumers are less of a financial risk and can manage credit responsibly as the economy recovers from the pandemic. 

However, as the number of new COVID-19 cases and jobless claims rise, economists are looking to the latest round of government assistance to better predict how consumers will weather the next few months—and what that means for debt management going forward.

“I think a lot really depends on the size and characteristics of the next stimulus bill,” Hoyt said. “The more money that goes to consumers, the further out that concern about delinquency is pushed. The less money there is for consumers, the closer that concern gets.”

If you're struggling to make credit card payments, contact your card company ASAP. The Balance found card issuers offered payment deferral and waived fees throughout much of 2020, and last we checked, many are still offering help to those who qualify. 

Fintechs Emerged With Stand-Out Card Offers 

Many things were put on hold in 2020, but new credit card releases were not one of them. Several financial technology firms unveiled new products, many of which are quite different from traditional credit cards—and in good ways. 

Venmo released a card that lets you earn its top rewards rate on the shopping category you spend the most on each month. For example, if you spend heavily on groceries in January, you’ll get 3 points per dollar spent (the top rate) on those purchases, but if in February you spend more on dining out, you’ll earn the top rate on those buys. That’s a game changer in a field where most cards have a predefined set of bonus categories. 

SoFi, another fintech and one that’s otherwise known for student loan offers, launched a credit card offering a competitive 2% cash-back rewards rate when cardholders deposit their earnings into a SoFi cash or investing account, or use them to pay back a SoFi loan. 

One of the new products—the Chime Credit Builder Secured Card—is designed for consumers who prefer using debit cards or who can’t qualify for a traditional card. It’s technically a secured card, but there are no fees, interest, or credit checks required, since it’s connected to a Chime deposit account. Petal also launched a new card for consumers with poor credit that considers applicant banking history in addition to credit scores. 

“The fintechs are reaching out to that demographic that may have been hardest hit this year,” said Sarah Prohm, managing director of financial services for Competiscan, a marketing research firm.

What This Means For You Next Year

If you’re in the market for a new card, you will have some interesting options in 2021. Some of the newest cards might be more accessible than traditional offers, especially if you’re already a customer with one of the fintechs mentioned above.

Industry experts say these new credit card products will encourage innovation from the more traditional card issuers, too, which (in theory) will result in better products and experiences for you. For example, “the Venmo Card has an advantage with a seamless experience with the popular Venmo app, so I see that mobile experience being something card issuers will look to compete with,” Prohm said. 

If you want to hop on the Bitcoin bandwagon while the cryptocurrency is hot, watch for the BlockFi Bitcoin Rewards Credit Card’s debut this spring. The Visa card will offer 1.5% back on all purchases, and instead of being paid in dollar-denominated cash back, the rewards will be deposited as Bitcoin into a BlockFi account. 

Travel Cards Revamped Rewards Programs to Stay Relevant

When travel screeched to a halt this year, rewards card issuers sprung into action to make sure consumers could still get value from their cards while at home. Some of the biggest card companies, including American Express, Capital One, Chase and Citi, rolled out temporary ways to earn extra points and statement credits on cards that, in normal times, reward travel expenses the most. 

“They have been trying to emphasize the everyday earning potential,” said Jessica Duncan, director of research and insights for market research firm Competiscan. “No one is really talking about travel rewards right now.” 

Issuers have fought hard to keep cardholders using their cards during the pandemic, making some travel cards more flexible and rewarding than before. Many airline and hotel cards have offered extra points or miles on the purchases consumers have been making more often this year, such as groceries and restaurant takeout. Chase introduced its “Pay Yourself Back” program, which allows some cardholders to redeem points for statement credits on grocery, dining, and home improvement store purchases at the same value they would otherwise get for booking travel.

“Issuers are getting more creative and generous,” Duncan said.

What This Means For You Next Year

If you have a travel rewards card in your wallet, keep racking up extra points while you’re at home. Several of the offers originally positioned as short-term deals are still going. Some Chase and Capital One travel cards are offering additional everyday spending rewards—on categories such as groceries or streaming services— through April 2021. The Chase Pay Yourself Back program also now lasts through April for Sapphire cardholders. 

Industry experts say the deals will just keep coming, too, as we all adjust to the new normal—banks included. 

“Cards have been evolving with consumers and the pandemic, and that will continue to be the case," Duncan said. “Issuers will have to keep meeting people where they are. That means there will be more redemption options, too. They will have to make it easier for people to use all the points they have earned.” 

Bottom Line

While 2020 saw a whirlwind of changes for the financial world, many of the credit card shifts that happened this year are actually for your benefit now, and in the year ahead. 

“There’s more flexibility, there is more thoughtfulness,” Duncan said. “That is a positive silver lining coming out of the pandemic. More than ever, card issuers want to make you feel like they are listening to you.”

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