More would-be borrowers get turned down
Those with weaker credit are finding it harder to tap new funds
Half of Americans who applied for loans in the past two years were turned down, according to a new survey from the personal finance site Bankrate.com.
That finding comes at a time when banks have been tightening rules for lending money to consumers. Interest rates have spiked dramatically since 2022 as the Federal Reserve battles inflation.
According to the new Bankrate survey, the odds of getting approved for a loan today amount to a coin flip. Half of the applicants face denial, sometimes more than once. The survey, conducted by YouGov, covered 2,483 adults in January and February.
Unsuccessful borrowers most often reported getting denied a new credit card or a credit limit increase on an existing card. Others said they’d been turned down for personal or car loans.
Banks have been tightening credit in response to the Fed’s aggressive campaign to raise interest rates. Between March 2022 and July 2023, the Fed lifted its benchmark rate from essentially zero to more than 5%, a 22-year high.
The Fed raised rates to counter inflation, which reached a 40-year high of 9.1% in June 2022.
“I think the reason why credit is tighter today is how quickly rates turned around and surged,” said Sarah Foster, a Bankrate analyst.
Higher interest rates prompted banks to restrict lending. In a Fed survey last summer, many banks said they had tightened lending standards. Almost no banks said they had made borrowing easier.
Some banks continue to tighten credit standards in 2024, according to the latest Fed survey, taken in January.
Tighter credit leaves potential borrowers in a uniquely unpalatable position: Loans cost more, and it’s harder to get one.
Tighter credit has descended at a moment when many Americans are relying on borrowed funds to get by.
Roughly half of credit card holders carry a balance from month to month, up from 39% in 2021, Bankrate reported in another recent survey. The nation’s collective credit card balance now tops $1 trillion.