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Americans are having a harder time getting approved for loans and other financial products nearly two years after the Federal Reserve began aggressively hiking interest rates,
A new survey published by Bankrate found that 50% of loans or financial product applicants have been denied since the Fed started raising rates in March 2022.
Credit card applications have been rejected the most frequently, with 14% of Americans reporting that banks denied them a new credit card while another 6% were refused a balance transfer card. Others were denied a credit limit increase on their existing credit card (11%), a personal loan (10%), car loan or car lease (9%), insurance (8%) and a mortgage loan (5%).
Banks are tightening their lending standards in response to higher interest rates.
HIGH INFLATION IS STILL SQUEEZING AMERICANS’ BUDGETS
People walk past a Wells Fargo bank on Broadway on Dec. 20, 2022, in New York City. (Photo by Michael M. Santiago/Getty Images / Getty Images)
Fed policymakers have raised interest rates sharply over the past two years, approving 11 rate increases in the hopes of crushing inflation and cooling the economy. In the span of just 16 months, interest rates surged from near zero to above 5%, the fastest pace of tightening since the 1980s.
Hiking interest rates tends to create higher rates on consumer and business loans, which then slows the economy by forcing employers to cut back on spending. Higher rates have helped push the average rate on 30-year mortgages above 8% for the first time in decades. Borrowing costs for everything from home equity lines of credit, auto loans and credit cards have also spiked.
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“One of the ways higher borrowing costs wrestle inflation is by slowing the flow of credit to households and businesses,” said Sarah Foster, a Bankrate analyst. “Lending doesn’t stop, but financial firms grow pickier about who they approve for a loan, assessing factors such as income, outstanding debt and payment history.”
When credit conditions tighten, banks significantly raise their lending standards, making it difficult to get a loan. Borrowers may have to agree to more stringent terms like high interest rates as banks try to reduce the financial risk on their end. Fewer loans, in turn, lead to less big-ticket spending by consumers and businesses.
When credit conditions tighten, banks significantly raise their lending standards, making it difficult to get a loan. (Justin Sullivan/Getty Images / Getty Images)
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The share of Americans who have been denied a loan or financial product is “substantially” higher for those with lower credit scores. For instance, about 73% of individuals with a “poor” credit score, ranging from 300 to 579, have been denied a loan or financial product, compared to 63% with “fair” credit, ranging from 580 to 669, and 55% with “good” credit, ranging from 670 to 739.
“One of the best ways Americans can insulate themselves from higher interest rates is by concentrating on their credit score, which may be the factor that impacts them more than the Federal Reserve itself,” Foster said. “Lower your debt-to-income ratio, make payments on time and aim to utilize no more than 30% of your available credit.”
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