Applications dip, credit market shows signs of cooling off

Consumers' outlook sours on future credit experiences in NY Fed survey

By  |  Published: March 20, 2017

Fred O. Williams
Senior Reporter
Expert on consumer credit laws and regulations

Consumer credit market cooling off

The market for consumer credit shows signs of cooling off, as lenders closed more accounts and consumers said they applied for fewer credit cards and other types of debt, according to the February Credit Access Survey by the Federal Reserve Bank of New York.

The survey “shows an increase in unmet credit demand of U.S. consumers” compared to the previous survey in October, the regional Fed bank said Monday in a news release.

  • The share of people discouraged from applying for all types of credit in the past year rose to 7.1 percent, the highest level since mid-2014. Another 5 percent reported having at least one account closed by a lender, the highest on record since the survey began in 2013.
  • Credit application rates overall dropped to 39.9 percent, the lowest level on record, as borrowing fell across all credit scores and age groups.
  • In the credit card market, 25 percent of consumers reported applying for plastic within the past year, down from October’s 29 percent. Applications were the second-lowest rate on record since the survey began.
  • Rejections fell slightly by about 1 percentage point, but remained around the middle of the range seen over the past few years.

The Credit Access Survey, part of the Survey of Consumer Expectations, takes a look at the consumer credit market three times a year, in February, June and October. It looks at home mortgages, refinancing, and auto loans as well as credit cards.

“I don’t think it’s surprising if we’re seeing a little pullback,” said Scott Hoyt, senior director of consumer economics at Moody’s Analytics. Balances on credit cards have grown strongly over the past year, he said, despite a slight reduction in January, and default rates are already near historic lows, leaving little room for improvement.

The survey results are in line with the Fed’s most recent survey of senior loan officers, Hoyt said. Bankers in that survey predicted troubles in the credit card market picking up in 2017. Some said they had tightened standards for granting new credit cards in the fourth quarter of 2016.

Considering all types of consumer credit covered in the New York Fed’s survey of consumers, 31 percent said they had applied and been accepted in the past year, while 8 percent said they had applied and were rejected.

Looking ahead
Asked about their expectations for the year ahead, 26 percent of consumers said they expect to apply for credit, down from 28  percent in October 2016. 

“Consumers were also generally more pessimistic of future approval rates,” the Fed bank’s press release said. The share expecting a mortgage application would be rejected jumped to 41 percent, from 34 percent. Pessimism about credit card applications grew slightly, with 30 percent expecting to be rejected, up from 29 percent in October and 28 percent in June.

With interest rates going up, consumers may be wise to hit the pause button on further borrowing. The Federal Reserve has boosted short-term interest rates twice since December, and expects to make two more hikes this year.

Despite the sour outlook, Hoyt said he doesn’t think the expansion of credit that began after the Great Recession is about to stop. Households’ debt payments remain at low levels as a share of their available income, he said, based on the Fed’s household debt service ratio. “Consumers’ debt burdens right now are very low.”

Part of consumers’ pessimism may be due to the seasonal nature of borrowing. Households typically are trying to work off a post-holiday debt load during February, and may not be in the mood to think of taking on more at the moment. “I think consumers are able to handle more debt if they choose,” Hoyt said.

credit-card-applications-and-rejections

 

See previous survey coverage: Card applications up, rejections down


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Updated: 10-20-2017

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