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One of the ways monetary policy affects the economy is by exerting pressure on banks’ profitability. Consequently, banks become more cautious in extending credit to their customers.
The New York Fed recently published consumer-credit data, which provides clear evidence of this phenomenon. Although the labeling for the x-axis in the chart below is absent, the data series dates back to October 2013 and has been published three times a year since then. You can find the interactive chart with more details here.
In a June survey, it was found that 8.8% of respondents had been rejected after applying for credit in the past year. This is an increase from 7.1% in February and represents the highest rejection rate since the Fed’s rate-hiking cycle in 2018:
Let’s try to find a positive perspective on this trend. Is it possible that fewer people are applying for credit due to high interest rates, resulting in a higher proportion of applicants with lower credit scores?
However, this interpretation is not convincing. Although the credit-application rate only slightly decreased from 40.9% to 40.3%, the overall rejection rate significantly rose by 4.5 percentage points to nearly 22%. This represents the highest rejection rate since June 2018.
The New York Fed data shows that individuals with lower credit scores are not applying for credit more frequently, but they are facing higher rejection rates.
These applicants accounted for 53% of all applications, which is close to the long-term average and consistent with October 2019. However, their rejection rate stood at 56.7%, the second-highest on record:
Furthermore, the rejection rate for auto loans has surpassed the application rate for the first time. While this fact itself may not hold much significance, it highlights the record-high rejection rate for auto loan applicants in the past year.
Lastly, it’s quite remarkable to see the red line surpassing the blue line in the chart below:Follow Google News
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