US credit card applications tumble


Demand for consumer credit in the US has fallen dramatically during the Covid-19 crisis, with credit card applications falling to multiyear lows, according to a Federal Reserve survey released on Monday.

The proportion of households applying for any form of credit over the past 12 months fell by 11 percentage points, to 35 per cent, between February and October, according the New York Federal Reserve Bank’s survey of consumer expectations credit access survey.

But the drop in demand was most acute for new credit cards, where the application rate fell 10 points to just under 16 per cent, the lowest level since the Fed began collecting application data in 2013.

Charles Peabody, bank analyst at Portales Partners, said that the falling demand in part reflected federal stimulus programmes earlier in the year which sent cheques to many American households.

“A lot of the government money that has been given to individuals is sufficient to pay down credit card and auto debt,” he said, reducing demand for additional credit.

Credit card balances held by US banks have fallen by about $100bn to $750bn since the pandemic began, according to Fed data, and credit card networks recorded lower spending for much of the year as lockdowns have crimped activity — although Visa and Mastercard said there had been an almost full recovery in US payment volumes by October.

Line chart of ...and supply does, too showing US credit card demand falls

“We anticipate credit card borrowing will rise around the end of the year,” Mr Peabody said, though the new stimulus bill going through Congress could have a dampening effect, since it contains an additional round of direct payments to households.

There was an exception to the decline in credit demand shown in the latest Fed survey. Over 15 per cent of the surveyed households applied for a mortgage refinancing in the 12 months ending in October, according to the Fed survey, up from 11 per cent in February, reflecting sharply lower interest rates.

The decline in credit applications was greatest among those over 60 years of age and people with less than perfect credit scores, the Fed found.

At the same time as demand for credit has fallen, financial institutions have become more selective about extending it. Rejection rates for all types of consumer credit application rose by almost 4 percentage points, to 18 per cent, between February and October.

Rejection rates for credit cards, which hit a multiyear low in February, have since returned to a historically normal level of just over 20 per cent.

Rejection rates for mortgage refinancing applications, though, have plummeted from 16 per cent in February to less than 6 per cent in February. 

The results from the credit access survey broadly correspond to those of the Fed’s loan officer survey for October, which show that the proportion of institutions tightening credit standards for consumer loans jumped in the first half of this year. While credit standards have loosed since then, they still remain tighter than normal.


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