Credit card applications are on the rise as more Americans grapple with rising inflation and less cash ahead of the holidays.
Households are spending more on basic necessities like food, gas and housing, according to a survey by the New York Federal Reserve released Nov. 21.
Credit card interest rates have also hit record highs as the Federal Reserve continues its tightening policy to combat high inflation.
The New York Fed reported that credit card demand growth coincided with the record rise in credit card debt last year.
The credit card application rate rose to 27.1 percent in October, from 26.5 percent at the same time last year.
This is well above the pre-pandemic figure of 26.3 percent in February 2020.
Higher lending rates
Applications are expected to increase through 2023, although credit card annual percentage rates (APR) are expected to rise as the Fed continues to raise short-term interest rates.
The APR hit a new record high of 19.14 percent last week, higher than the record 19 percent set in July 1991, according to Bankrate.com.
Meanwhile, the average loan application rate fell to 44.8 percent in 2022 from 45.6 percent last year, mostly due to a drop in applications for mortgage, refinance and auto loans, with many respondents saying they were less likely to get loans would apply for next year.
“Looking ahead 12 months, households believe they are less likely to apply for an auto loan, mortgage, or mortgage refinance loan, but report a higher average likelihood of applying for a credit card or a credit card limit increase,” New York Fed researchers said in a statement.
“Consumers expect some relaxation in credit standards and report slightly lower average perceived probabilities that a future loan application will be denied, provided the application is made within the next 12 months.”
At the same time, current application rates for all types of loans rose for Americans with a credit score above 760 and fell for those with a score below 680.
Loan application rejection rates increased slightly by 0.5 percent from 17.5 percent in 2021, but declined for new credit card applications.
Many big banks have recently announced plans to tighten lending standards amid looming fears of a wider economic downturn.
Applications for other loans are dropped
“Credit card rates are much higher than most other forms of debt,” said Bankrate.com analyst Ted Rossman.
“We’re talking three, four, even five times what most people pay on mortgages, car loans, and student loans. Paying off your credit card debt should be your top priority, especially with interest rates at record highs.”
Unsurprisingly, mortgage loan applications fell 6.7 percent in October 2022 from 8.5 percent a year earlier, reflecting higher Fed-set lending rates and a declining housing market.
The mortgage refinancing rate saw the sharpest decline, plunging to 8.9 percent over the past month from 21.4 percent in October 2021.
The average interest rate on 30-year fixed-rate mortgages is now 6.84 percent, after hitting an all-time high of 7.08 percent earlier this month.
Mortgage rates have risen more than 50 percent since the beginning of 2022, after standing at 3.10 percent at the end of October last year.
The auto loan application rate remained at 12.9 percent in 2022, the same as October 2021, but the average application rate this year fell 1.6 percent from a year earlier as banks become increasingly reluctant to fund new auto loans.
The new survey comes after a report from the New York Fed last week showed that credit card balances rose more than 15 percent in the past year, the biggest annual jump in more than two decades.
“With prices more than 8% higher than a year ago, it is perhaps unsurprising that balances are increasing,” the Fed researchers wrote on Nov 15
“The real test, of course, will be whether these borrowers can continue to make payments on their credit cards.”