Consumers cut back on applying for credit cards, and the Fed is not amused.
By Wolf Richter for WOLF STREET.
Consumers in aggregate backpedaled massively on credit card applications since the Pandemic; and they also backpedaled on asking for a higher credit limit on credit cards they already had. And a larger percentage of those that did apply for a credit card or for a higher credit limit were rejected. These are some of the findings of the New York Fed’s Survey of Consumer Expectations “Credit Access Survey,” released today. The Credit Access Survey is undertaken three times a year (also in February and June).
The notion that consumers are cutting back on credit-card borrowing frazzles the Fed; the sky-high interest rates, in many cases over 20%, in a near-zero interest rate environment, is where banks make extraordinary profits. And consumers, those who can least afford it, are paying out of their nose for these bank profits.
Only 15.7% of consumers said they applied for a credit card over the past 12 months, down from the 25% to 31% range before the Pandemic, and down from 26.3% in February, and by far the lowest in the survey data going back to 2013:
The New York Fed, which, like all 12 Federal Reserve Banks, is owned by the largest financial institutions in its district, laments: “The latest Credit Access Survey reveals the stark imprint of the pandemic on consumer credit markets.”
Consumers also cut back on applying for auto loans, but only a tad compared to the steep cuts in credit card applications, the survey found.
And only 7.1% of consumers requested a higher credit limit on the credit cards they already had, the lowest in the survey data, and down from the 8% to 15% range in prior years.
So there is clearly an issue with consumers not falling in line with the Fed. One reason might be that credit card interest remains usuriously high even as the Fed has engaged in historic interest rate repression that is cleaning out savers and Treasury security holders who earn minuscule to no interest on their funds.
To borrow at 10%, 20%, 25% or god forbid 30% – credit card issuers have no compunction about going there – in this low-interest environment, folks would have to be ultra-desperate consumers or, well, just good consumers in the eye of the Fed, surrendering their hard-earned dollars to the banks in form of usurious interest.
But of those people who did apply for a credit card, perhaps to make the Fed happy, 21.3% were rejected, the third-highest rejection rate in the data series:
And 37.1% of those that had requested a higher credit limit were rejected:
These higher rejection rates might indicate a combination of two things: One, a shift in the mix of applications to consumers with bigger debt burdens and iffier credit histories, while other consumers are not applying, thereby raising the overall rejection rates; and tighter underwriting from banks.
These findings of consumers backpedaling on credit cards add another piece to the puzzle of why credit card balances overall have plunged in a historic and for the Fed in a nerve-wracking manner.
Credit card balances and other revolving credit balances in October plunged by 10.3% from a year earlier, the largest year-over-year decline in the data going back to the early days of credit cards, to $943 billion (not seasonally adjusted, red line), a balance first seen in August 2007, despite 13 years of inflation and population growth:
During the Financial Crisis, when credit card balances declined from June 2008 through May 2011 on a seasonally adjusted basis (green line above), there was another huge factor playing a role: Delinquencies and subsequent write-offs by lenders. Consumers massively defaulted on their credit cards – in 2009, nearly 14% of all credit card balances were delinquent – and many deleveraged by walking away from their debts and dealt with the consequences.
But this is not happening now. Newly delinquent credit card balances have dropped in the second and third quarter, powered by the mix of extend-and-pretend deferral programs and stimulus money:
What we’re witnessing are the bizarre effects of the Pandemic stimulus extend-and-pretend economy. And there just may be a flickering in consumers’ minds – I doubt it though – that borrowing at 10% or 20% in a near-zero interest rate environment is good only for bank stockholders, and is otherwise a stupid deal, and that it’s time to starve the banks of that big-fat source of revenue by paying off that high-interest debt.
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