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Whether it’s causation or correlation is up for debate, but it cannot be argued that in the wake of the Federal Reserve’s interest rate tightening campaign that began in 2022 and took rates to 20-year highs, consumers’ access to credit has been constrained.
Undeniably, those high interest rates are the result of high inflation and while the latter is easing (somewhat), there hasn’t been any action in terms of lowering rates. And while a slew of social media-enthused economists claim everything is sanguine when it comes to inflation, far too many consumers relied on credit to get through price shocks caused by bad government policy.
Those are among the reasons why auto loan and credit card delinquencies recently hit all-time highs. It’s a vicious circle. Inflation rises, the Fed responds, consumers tap credit more than they normally would and banks tighten lending standards.
In fact, the access to credit picture is downright ugly at the moment with little clarity as to when it will improve.
Good Credit Takes on Added Importance
When it comes to personal finance, maintaining a good or better credit score is an all-weather strategy that serves everyone well. That’s particularly true to today.
A recent survey by BankRate indicates that half of consumers that applied for credit cards or personal since the Fed started hiking rates in 2022 have been rejected. Another 17% have been turned down more than once.
“Americans are getting rejected for the credit lines that many households have found crucial for absorbing the cost of higher prices, from new credit cards (at 14 percent) to personal loans (at 10 percent). Some are even having trouble accessing the loans that could help them pay off those balances more quickly, such as balance transfer cards (6 percent) or debt consolidation loans (6 percent),” according to the research firm.
Making matters is the point that more than 80% of the denied applicants needed new credit to deal with older bills that rose due to inflation and when denied credit by traditional lenders, they went to dubious sources. That results in higher interest rates, longer payback periods and more stress.
“To access the credit they needed, almost 1 in 4 applicants who were denied (23 percent) pursued alternative financing, such as cash advances or payday loans — coming with even higher interest rates that can be as high as 650 percent,” adds BankRate.
Situation Improving, But Fed Looms Large
The bank failures themselves haven’t been quiet, but something that has been kept quiet is that several of the largest bank collapses in U.S. history have occurred since 2021. That’s one reason other lenders tightened credit standards.
There are signs of some breathing room on that front because fears of more large-scale bank failures have abated. However, the Fed remains the wildcard when it comes to increased access to credit.
“Yet, accessing credit is still tougher today than it was before the pandemic — and by design. The tide may turn only if the U.S. economy continues to avoid a recession and the Fed eventually cuts interest rates,” concludes BankRate.
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