mortgage loan application form and new home keys on the bank office table. copy space
Millions of people have become dependent on credit as one way to get themselves through tough economic times, let alone do something normal, like buying a house or car. Now credit rejections are at a record high.
News out of the Federal Reserve Bank of New York is bad. It has become harder than ever before to get approved for credit. Not necessarily for all time, but at least for as long as the New York Fed has run surveys on the topic, which is since 2013, not long after the Great Recession when millions faced financial problems.
Dependence on credit use
To get a sense for a moment how important credit has become and why, here is a graph of federal government data showing how median inflation-adjusted household income growth has compared to the cost of living over time.
Real median U.S. household income versus CPI
Between 1984 and 2024, median household income has grown by 40%. Compare that to the effect of inflation on the value of the dollar. It takes $3 in 2024 to match the buying power of $1 in 1984. How do people manage the difference? Some are effectively dependent on government charity, whether it’s the Earned Income Tax Credit, the Supplementary Nutritional Assistance Program (SNAP, previously known as food stamps), or another program to make up for what companies no longer pay.
But over a certain point in the socioeconomic map, it’s sink or swim. Maybe you will make enough. Perhaps there’s family money. For millions and millions in the great amorphous middle, the answer is credit and has been for decades. Here’s a graph of how revolving credit use, like credit cards, has grown over time.
Credit card and other revolving credit plans use
Add loans to buy cars, pay for higher education, repair homes. In a sense, you could argue that something like health insurance acts like a loan. You have regular payments, which are premiums, that you have to make every month. If something doesn’t go wrong, enabling use, the money doesn’t come back.
Credit rejections hit record high
There is a giant squeeze on consumers, meaning virtually everyone. Credit has become a way of handling the load if not reducing it. Putting it off, kicking the financial can down the road.
The danger is that people use up credit or find that they can’t get it when they need it. What the New York Fed found in its latest survey on the topic was that people are getting turned down for credit at a rate they had never before seen. Here are some examples:
· The average auto loan rejection rate rose to 11.4%.
· Rejections for mortgages hit 25.6%, up from the previous high in 2023 of 15.5%, Only 6% of those surveyed reported applying for one.
· Only 3.1% of those surveyed applied for a mortgage refinance; of them, 22.0% were rejected.
· Voluntary account closures dropped to 13.9% from the previous series low of 15.8% in 2023, because people didn’t want to or couldn’t afford to drop the credit.
· Lender-initiated closures rose to 7.4%, up from 7.2% in 2023.
· About 28.6% of those polled applied for credit cards while 22.2% of the applicants were rejected.
· Of credit card holders, 15.0% requested a limit increase and of them, 44.5% were rejected.
There are no rescue funds and not apparent appetite for them in Congress or the upcoming administration. With credit rejections at a record high, one more door closes on consumers.