Credit is tightening, but it’s not a credit crunch

Since March 2022, the Federal Reserve has raised interest rates aggressively in an effort to combat the highest inflation readings in four decades. Central to this concept is the belief that when it gets more expensive to borrow money, consumers and businesses will spend less and price increases will slow. Credit cards are among the most affected financial products, because they’re widely used and they already had high interest rates, which have become much higher as a result of the Fed’s series of rate hikes.

At present, the average credit card charges a record-high 20.60 percent. That’s up from 16.34 percent just before the Fed started raising rates in March 2022. And not only has it become more expensive to borrow money using a credit card, it has become more difficult to qualify for a credit card as well.

The Fed’s most recent Senior Loan Officer Survey revealed that 36 percent of lenders tightened their credit card approval standards during the second quarter of this year. During the first quarter, 33 percent tightened. Prior to that, 28 percent got stricter in the fourth quarter of 2021 and 19 percent did so during the third quarter of last year.

The percentage of lenders that are tightening up has risen steadily, and there can also be a cumulative effect to these moves. In other words, gradual changes can be tougher to notice, but they can certainly add up over time (the “boiling pot” metaphor). That said, I still believe that credit card issuers are tilted in a “risk-on” direction.

Why this is not a credit crunch

For starters, all of this tightening has been defined in the Fed’s reports as “tightened somewhat,” as opposed to the more serious “tightened considerably.” Plus, Americans opened more credit cards last year than any other year on record, and through the first four months of this year were actually slightly ahead of that record pace, according to the latest data from Equifax.

Contrast this with the second quarter of 2020, shortly after the COVID-19 pandemic exploded onto the scene, when nearly three-quarters of credit card issuers tightened their lending standards (41 percent “somewhat” and 30 percent “considerably”). Credit card originations fell 27 percent, year-over-year, in 2020. We’re not seeing anything like that right now.

Another angle is that just 22 percent of credit card applicants were rejected in June of this year, the New York Fed reported. That was up four percentage points over the past year, but in line with most readings over the past decade and down five percentage points from Feb. 2021. With nearly four out of every five applicants getting the green light, this is further evidence that today’s modest tightening isn’t anywhere close to a credit crunch.

The biggest cutbacks are on the margins. For example, if you have a lower credit score, you’re probably experiencing this tightening much more acutely. Per the report cited above, Equifax found that just 17.8 percent of credit card accounts originated in the first four months of this year went to individuals with subprime credit scores — the lowest share since 2014.

The bottom line

Credit tightening, especially on subprime borrowers, is emblematic of the broader economy right now. Inequality continues to grow, exacerbated by inflation and rising interest rates. This is why I believe that “all news is local,” in that the relatively positive macro picture obscures some of the difficulties consumers may be experiencing at the household level.

Writ large, we’re not seeing anything particularly concerning with respect to delinquencies or households’ debt-to-income ratio, largely because the labor market has been strong. Most recent economic data has been strong and recession fears seem to be fading.

But at the individual level, if your household is carrying expensive credit card debt and/or finding it harder to access credit, that’s potentially a big deal for you. It reminds me of the saying that “a recession is when your neighbor loses their job and a depression is when you lose yours.” When it comes to credit cards, there’s a tremendous difference in terms of impact between someone who pays in full and uses credit cards for rewards and convenience, versus someone who uses credit cards as an expensive financing mechanism.

Our research has found that this balance is roughly half and half: 53 percent of credit cardholders pay in full and avoid interest each month, while 47 percent carry balances. If you fall into the latter category, don’t feel ashamed. A lot of people have credit card debt, and it’s often for very practical reasons. But it’s still essential to come up with a good plan to pay it down as quickly as possible, given credit cards’ incredibly high interest rates. Here’s my best debt payoff advice.

Have a question about credit cards? E-mail me at ted.rossman@bankrate.com and I’d be happy to help.