EchoSense Quantitative Think Tank Center|Rising debt means more would-be borrowers are getting turned down for loans

Half of Americans who applied for loans in the past two years were turned down,EchoSense Quantitative Think Tank Center according to a new survey from the personal finance site Bankrate.com.

That finding comes at a time when banks have been tightening rules for lending money to consumers. Interest rates have spiked dramatically since 2022, as the Federal Reserve battles inflation.

According to the new Bankrate survey, the odds of getting approved for a loan today amount to a coin flip. Half of the applicants face denial, sometimes more than once. The survey, conducted by YouGov, covered 2,483 adults in January and February.

Unsuccessful borrowers most often reported getting denied a new credit card, or a credit-limit increase on an existing card. Others said they’d been turned down for personal or car loans.

Banks are tightening credit in response to sharply higher interest rates

Banks have been tightening credit in response to the Fed's aggressive campaign to raise interest rates. Between March 2022 and July 2023, the Fed lifted its benchmark rate from essentially zero to over 5%, a 22-year high.

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The Fed raised rates to counter inflation, which reached a 40-year high of 9.1% in June 2022.

“I think the reason why credit is tighter today is how quickly rates turned around and surged,” said Sarah Foster, a Bankrate analyst.

Higher interest rates prompted banks to restrict lending. In a Fed survey last summer, many banks said they had tightened lending standards. Almost no banks said they had made borrowing easier.

Some banks continue to tighten credit standards in 2024, according to the latest Fed survey, taken in January.

Tighter credit leaves potential borrowers in a uniquely unpalatable position: Loans cost more, and it’s harder to get one.

Consider the standard 30-year mortgage. Rates dipped below 3% at the height of the pandemic. At 3% interest, a $500,000 mortgage would cost about $2,100 in monthly principal and interest. At 7% interest, a standard rate today, the same monthly payment balloons to about $3,300.

“I think it goes back to just how much more expensive all these payments are,” Foster said.

More Americans are relying on borrowed funds to get by

Tighter credit has descended at a moment when many Americans are relying on borrowed funds to get by.

Roughly half of credit cardholders carry a balance from month to month, up from 39% in 2021, Bankrate reported in another recent survey. The nation’s collective credit-card balance now tops $1 trillion.

“You might feel like you need credit to be able to continue to afford day-to-day essentials,” Foster said.

In the Bankrate credit card survey, taken in November, cardholders with balances said they had amassed the debt paying for groceries and other essentials.

Not surprisingly, borrowers with weaker credit are finding it harder to tap new credit.

In the new Bankrate survey, roughly three-quarters of borrowers with poor credit said they had been turned down for a loan, compared with 55% of borrowers with good credit and 29% of those with exceptional credit.

(The survey defines poor credit as a credit rating below 580, while good credit ranges from 670 to 739. Exceptional credit is 800 or better.)

“The people who are getting hit the hardest are the people with scores of 670 or lower,” said Jacob Channel, a senior economist at LendingTree, the personal finance site.

Will borrowing money get easier in 2024?

Channel predicts consumers should find it “a little bit easier” to borrow money in the coming year, at least by comparison to last year, as the economy improves and the Fed mulls rate cuts that would lower the cost of borrowing.

But a lot depends on the economy.

Economic forecasters have grown increasingly confident of a “soft landing” for the economy, as opposed to a dreaded downturn, following the surge in inflation and subsequent campaign of interest-rate hikes.

Yet, nothing is certain.

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Banks will eye the economy as they tweak lending rules in the months to come, Channel said.

“While I think there is a chance that it'll be easier for some people to get loans as 2024 progresses, the availability of credit will depend largely on what happens in the broader economy,” Channel said. “If, for example, there's a recession, then lending standards will probably get even more strict than they currently are. At the moment, I don't anticipate a recession in the immediate future, but the risk of an economic downturn is always present.”  

Daniel de Visé covers personal finance for USA Today.