Credit Card Applications Rise Despite Decreases in Other Forms of Credit

Americans’ appetite for credit cards grew this year, even as they shied away from other forms of credit, according to a new report from the New York Fed.

The NY Federal Reserve has reported that the application rate for credit cards increased to 27.1% in October 2022, up from 26.5% last year and above its pre-pandemic reading of 26.3% in February 2020. But application rates for mortgages, refinances, and auto loans fell during the same period.

The rise in credit card demand mirrors the growth in credit card balances over the past year, the New York Fed reported, and is expected to continue into 2023 even though credit card rates are likely to increase as the Federal Reserve hikes short-term interest rates.

“Looking ahead over the next 12 months, households anticipate they will be 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 credit card limit increase,” New York Fed researchers said in a news statement.

Mortgage loan applications declined 6.7% in October 2022 from 8.5% last year, according to the report. In addition, mortgage refinance rates experienced the sharpest downturn, plunging from 21.4% in October 2021 to 8.9% in October 2022. These declines in mortgage activity is not a surprise.

Mortgage rates have more than doubled since the start of the year, with the average 30-year fixed-rate mortgage currently sitting at 6.61%, down from its recent peak this year of 7.08% earlier this month. A year ago, the rate on the 30-year loan averaged 3.10%.

The sharp increase in rates in tandem with elevated home prices have hurt homebuyer demand in recent months, according to the Mortgage Bankers Association’s latest survey, with purchase activity down 46% from a year ago. Sales of previously owned homes have now fallen for nine consecutive months in October, down 28.4% year over year.

Higher mortgage rates have also discouraged homeowners from refinancing, according to the MBA, as refi activity nosedived 88% year over year.

The application rate for auto loans remained at 12.9% this year, equal to the rate in October 2021. But the average application rate for the year overall still declined from 14.6% in 2021 to 13.0% in 2022.

Part of the issue may be a reluctance by banks to originate new auto loans. Many banks are experiencing higher charge-offs on existing loans as car prices fall. Prices for used vehicles are currently down 13.7% in November 2022, versus a year ago.

Overall, some of the largest U.S. banks have recently announced plans to tighten lending standards as concerns of a recession continue to brew Banks had reported they were also less likely to approve credit card and auto loan applications for borrowers with FICO scores of 620 and 680 versus the beginning of the year, the New York Fed found in a separate report.

The tightening of credit should increase further as the economy slows down in months ahead – stay tuned.