U.S. Consumers Are Still Applying for Credit Cards Despite Higher Rates

US consumers continued to seek out more credit cards this year even as the Federal Reserve aggressively lifted borrowing costs, a shift that cooled demand for mortgages, auto loans and other types of credit, according to research from the New York Fed.

The New York Fed’s most recent credit-access survey showed an application rate for credit cards of 27.1% for October, remaining “robust” after a 26.5% rate seen a year before. By contrast, the application rate for credit overall declined slightly, after a 2021 rebound.

Demand for any kind of credit is strongest from consumers with high credit scores, the study showed. Application rates for people with credit scores over 760 were above pre-pandemic levels, while rates for consumers with credit scores below 680 were below pre-pandemic levels.

Tighter Standards

The Fed is attempting to cool the economy and inflation by rapidly raising interest rates, which makes it more expensive for consumers and businesses to borrow money. Policymakers lifted the target on their benchmark interest rate to a range of 3.75% to 4% this month, up from near zero levels in March.

Commercial banks are also tightening lending standards on loans for businesses and commercial real estate to levels usually seen during recessions, according to a Fed survey of lending officers released earlier this month.

The Fed’s rate moves are having a clear effect on the housing market, with mortgage rates near 7%, more than double the levels seen at the start of the year. The shift priced out some homebuyers and put an end to the refinancing boom that happened after the Fed slashed rates to support the economy during the pandemic.

Application rates for mortgage refinancing “plummeted” this year, reaching 8.9% in October 2022 from 21.4% in October 2021, according to the New York Fed’s survey. Mortgage loan application rates overall declined to 6.7% in October 2022 from 8.5% in October 2021. After the drop, refinancing levels are closer to the levels seen from 2017 to 2019, according to the report.

The findings also showed that some consumers are marginally more concerned about their future expenses. The odds of being able to come up with $2,000 to cover a surprise expense in the next month dropped to an average 67.5% in 2022 from 68.2% last year. But the anticipation of needing to find $2,000 to cover such an expense also dipped to an average probability of 32% this year from 33.1% last year.

Looking to the future, consumers said they were less likely to apply for mortgages and auto loans over the next 12 months. But there was an increase in the share of people who expect to apply for a credit card or a higher credit card limit. The findings are in line with a separate Fed report released last week showing that credit card debt surged over the past year by the most in 20 years.

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