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Credit Access Tightens for Americans Amid Aggressive Federal Interest Hikes

Rising interest rates and inflation are reshaping America's lending landscape, with the New York Federal Reserve revealing alarming credit accessibility trends.

NY Fed building
NY Fed building

Strained Credit Market: A Rising Tide of Loan Rejections

According to the latest report from the New York Fed, American loan applicants are facing an uphill battle. The overall rejection rate for credit applicants surged to its highest since June 2018, currently standing at 21.8%, up from 17.3% in February. The bank highlighted that this rise was prevalent across all age groups and more pronounced among those with credit scores below 680.

Auto Loans and Mortgages: Record-High Rejection Rates

The credit crunch is hitting auto loans hard, with rejection rates reaching an all-time high in a data series that dates back to 2013. The rate escalated to 14.2%, a notable jump from February's 9.1%. Likewise, rejection rates for credit cards and credit limit increases have also gained traction. Mortgage rejections in June stood at 13.2%, rising from February's 10%. Furthermore, the rejection rate for mortgage refinancing reached a worrying 20.8%.

A Shift in Loan-Seeking Behavior Amid Rising Rejections

The New York Fed's survey indicated a record probability of loan rejections for auto loans, credit cards, credit limit increases, and housing-related credit. This shift was accompanied by a mild decline in the number of people seeking loans, dropping to 40.3% in June. However, the number of respondents planning to apply for credit in the coming year saw a slight increase to 26.4%.

The Federal Reserve's Role in the Changing Credit Landscape

The Fed has made aggressive moves, elevating its short-term target interest rate since the spring of 2022 to curb soaring inflation. This strategy has impacted credit accessibility, making it increasingly difficult for borrowers to secure loans. It's widely predicted that the Fed will persist in raising the rates in the upcoming week.

Housing Sector: The Domino Effect of Rising Interest Rates

The ripple effect of rising rates has significantly affected the housing sector, with mortgage costs climbing from sub-3% in the fall of 2020 to nearly 7% currently. This inflation has led Americans to pull back on borrowing, even causing a decrease in mortgage demand, as reported by the New York Fed in May. Concurrently, bank lending to consumers remains relatively steady, but signs of a slowdown are emerging.