Just as Americans look for a loan to stay afloat, it can be hard to get.
The rejection rate for people applying for credit jumped to 21.8% in June, up from 17.3% in February and a five-year high, according to a Federal Reserve survey on Monday. The survey is released every four months with data collected during February, June and October. She added that the recent increase was broad across age groups and was highest among those with credit scores below 680. The highest credit score is 850 and the lowest is 350.
The report underscores the caution being taken by financial institutions amid one of the most aggressive Fed rate hikes in history and a potential recession. Major banks such as JP Morgan Chase, Citigroup, Wells Fargo and now, Bank of America, have reported that they are setting aside more money to cover bad consumer loans as credit card balances rise. Late payment rates in credit cards and other retail lines are on the rise and are expected to rise further before falling back to ‘normal levels’. Mark Mason, Citigroup’s chief financial officer, said on a conference call last week.
The four largest US lenders wrote off $3.4 billion worth of bad consumer loans in the first three months of 2023, up 73% from a year earlier, according to Bloomberg.
“Our net debits continue to slowly increase from historic lows, as has our allowance for credit losses,” Wells Fargo’s chief financial officer, Mike Santomasimo, said on an earnings conference call last week. Tightening measures where we see fit.
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Exploited:Inflation is declining. Many Americans say they still suffer.
What types of loans experience the most rejections?
The rejection rate for auto loans rose to 14.2% from 9.1% in February, the highest level since this data was first collected in 2013 and for the first time it has surpassed the application rate.
“It’s a risk-averse situation for banks,” said Alex Legl, chief executive of Tenet, which provides financing for electric vehicles, referring to a trend over the past year in which banks have cut back or exited auto lending entirely. “Consumers are already under pressure, and even worse now that banks are cutting back on lending.”
The Fed said the decline rates for credit cards, credit card limit increase requests, mortgages, and mortgage refinance requests rose to 21.5%, 30.7%, 13.2%, and 20.8%, respectively.
What do consumers do?
The survey showed that as interest rates rose, total credit applications over the past 12 months fell to 40.3%, the lowest level since October 2020 and down from 40.9% in February. However, the share of respondents who said they were likely to apply for one or more types of credit within the next 12 months rose to 26.4% from 26.1% in February.
Will new loan applications continue to be rejected?
The Fed said the average reported probability of a loan application being rejected increased sharply for all types of loans. They were as follows:
◾ Auto loans rose to 30.7%, the highest level since the Fed began collecting this data in 2013.
Credit card share increased to 32.8%.
Applications for credit limit increases jumped to 42.4%, the highest level since the series began, and mortgages jumped to 46.1%, also a rise in the data series.
Mortgage refinancing increased to 29.6%.
Medora Lee is USA TODAY’s money, markets and personal finance correspondent. You can access it at[email protected] And sign up for the free Daily Money newsletter for personal financial advice and business news every Monday.
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