Americans keep signing up for credit cards but pull back on other credit

Americans’ appetite for credit cards grew this year, even as they shied away from other forms of credit, according to a new report.

The application rate for credit cards increased to 27.1% in October 2022, according to the latest report from the New York Federal Reserve, up from 26.5% last year and above its pre-pandemic reading of 26.3% in February 2020. But application rates for mortgages, refinances, and auto loans fell during the same period.

The rise in credit card demand mirrors the growth in credit card balances over the past year, the New York Fed reported, and is expected to continue into 2023 even though credit card rates are likely to increase as the Federal Reserve hikes short-term interest rates.

“Looking ahead over the next 12 months, households anticipate they will be less likely to apply for an auto loan, mortgage, or mortgage refinance loan, but report a higher average likelihood of applying for a credit card or credit card limit increase,” New York Fed researchers said in a news statement.

An air traveler uses a credit card to pay for items January 28, 2022 at a retail shop in John F. Kennedy International Airport in New York City. (Credit:Robert Nickelsberg/Getty Images)
An air traveler uses a credit card to pay for items January 28, 2022 at a retail shop in John F. Kennedy International Airport in New York City. (Credit:Robert Nickelsberg/Getty Images)

Overall, the average application rate for credit fell to 44.8% in 2022, down from 45.6% a year prior and below its pre-pandemic 2019 level of 45.8%. The pullback was driven by a decrease in mortgage, refinance, and auto loan application rates.

Mortgage loan applications declined 6.7% in October 2022 from 8.5% last year, according to the report. Meanwhile, mortgage refinance rates experienced the sharpest downturn, plunging from 21.4% in October 2021 to 8.9% in October 2022.

The decline in mortgage activity is not a surprise.

Mortgage rates have more than doubled since the start of the year, with the average 30-year fixed-rate mortgage currently sitting at 6.61%, down from its recent peak this year of 7.08% earlier this month. A year ago, the rate on the 30-year loan averaged 3.10%.

The sharp increase in rates in tandem with elevated home prices have hurt homebuyer demand in recent months, according to the Mortgage Bankers Association’s latest survey, with purchase activity down 46% from a year ago. Sales of previously owned homes have now fallen for nine consecutive months in October, down 28.4% year over year.

“It’s a lot of pressure being felt from an affordability standpoint,” Andy Walden, vice president of enterprise research and strategy at Black Knight, told Yahoo Money.

Higher mortgage rates have also discouraged homeowners from refinancing, according to the MBA, as refi activity nosedived 88% year over year.

“Time has run out for the moment to refinance,” Walden said. “There’s very little incentive to refinance right now to improve your interest rate. The prospects may be a little bit better as we move to 2023 if you see interest rates ease off, but we’re talking about record low refinance incentives out in the market right now.”

Michelle Ruiz (L) and Nilson Ruiz listen as Wells Fargo home mortgage consultant, Michael Carreras, helps the potential homeowners with their an application for a down payment assistant grant in Miami, Florida. (Credit: Joe Raedle, Getty Images)
Michelle Ruiz (L) and Nilson Ruiz listen as Wells Fargo home mortgage consultant, Michael Carreras, helps the potential homeowners with their an application for a down payment assistant grant in Miami, Florida. (Credit: Joe Raedle, Getty Images)

The application rate for auto loans remained at 12.9% this year, equal to the rate in October 2021. But the average application rate for the year overall still declined from 14.6% in 2021 to 13.0% in 2022.

Part of the issue may be a reluctance by banks to originate new auto loans. Many banks are experiencing higher charge-offs on existing loans as car prices fall. Prices for used vehicles are currently down 13.7% in November 2022, versus a year ago.

Overall, some of the largest U.S. banks have recently announced plans to tighten lending standards as concerns of a recession continue to brew.

Banks had reported they were also less likely to approve credit card and auto loan applications for borrowers with FICO scores of 620 and 680 versus the beginning of the year, the New York Fed found in a separate report.

According to New York Fed researchers, those who said they were likely to apply for at least one type of credit over the next twelve months fell from 28.9% in October 2021 to 28% this year, driven in large part by consumers with credit scores below 680.

Expectations for credit card holders improve, despite higher interest rates

Home inspector using portable credit card reader on smartphone. (Credit: Jeffrey Greenberg/Universal Images Group via Getty Images)
Home inspector using portable credit card reader on smartphone. (Credit: Jeffrey Greenberg/Universal Images Group via Getty Images)

The share of respondents saying they are likely to apply for a credit card over the next year rose to 13.6% in October 2022, from 12.0% last year. The share of consumers that said they would consider a credit limit increase also jumped to 7.2% in this year from 6.9% October 2021.

The news comes even as borrowers begin to feel the pinch of rising interest rates on their credit cards.

The average credit card APR reached 19.04% in the second week of November, according to Bankrate’s records dating back to 1985, exceeding the previous record of 19.00% in the first week of July 1991. The rate has jumped 2.74 percentage points since the start of the year, the largest year-to-date gain.

Rates on store-branded credit cards are even higher, with retailers pushing their APRs past 30%, the unofficial threshold most credit cards would not exceed, according to LendingTree.

Rising rates on credit cards are not over yet. The Fed again raised its benchmark interest rate by three-quarters of a point for the fourth time in November, totaling six increases overall this year. The central bank plans to raise rates more until it curbs inflation.

“The increase in rates was inevitable for some cards with how quickly and frequently the Fed has raised rates throughout the year,” Matt Schulz, chief credit analyst for LendingTree, told Yahoo Money. “It’s clear that even with higher interest rates, people are willing to take on that risk in order to save a little bit of money on their purchase upfront.”

Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.

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