Fed Survey Shows Tightening Credit Standards Across the Board

Credit cards, auto loans, and mortgages are all harder to get

Denied credit card application
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U.S. banks tightened their credit approval standards across all types of consumer loans during the second quarter, making it more difficult for Americans to borrow during the coronavirus pandemic, the latest Federal Reserve survey of bank lending practices shows.

On balance, banks surveyed for the Fed’s Senior Loan Officer Opinion Survey on Bank Lending Practices showed they were less willing to make all forms of consumer loans—including mortgages, credit cards, and auto loans, the Fed said this week. 

In fact, nearly three-quarters (72%) of all surveyed banks said they made it harder to get a credit card, lowering credit limits or raising minimum credit score requirements for new applicants, among other things, the survey showed. That was the biggest share of banks reporting stricter credit card approval standards since at least 1996, when the Fed’s online data begins. The only time it was even close was during the 2008 economic recession.

Key Takeaways

  • The quarterly survey shows banks are tightening credit approval standards across the board, affecting all types of consumer loans
  • Almost three-quarters of banks surveyed said they tightened credit card approval terms in the second quarter, more than in any quarter since at least 1996 
  • The stricter terms are driven primarily by the uncertain economic outlook and banks’ desire to protect themselves against financial loss
  • Meanwhile, on balance, more banks are seeing fewer people applying for most types of loans, particularly new credit cards and auto loans
  • The one area where demand has not weakened is mortgages, likely because of the historically low interest rates

“The speed and magnitude of banks tightening their lending standards was notable, though not surprising given other economic indicators,” said Cris deRitis, deputy chief economist at Moody’s Analytics. Unsecured lending like credit card loans are “particularly vulnerable to concerns about the future path of the economy given that there is no collateral to offset losses on these loans in the event that a borrower defaults.”    

The Fed survey, done quarterly, tracks both consumer and business loans, and in this case, reflected 75 domestic banks and 22 U.S. branches and agencies of foreign banks. It monitors demand as well as lenders’ willingness to extend new loans or change terms on existing loans. Tightening typically indicates banks are bracing for (and trying to avoid) increasing defaults and financial losses during economic downturns. It can mean they make credit more difficult to obtain, lend less money out, or make their loans more costly. 

Interestingly, there was one area banks bucked the trend. Virtually all respondents resisted increasing credit card minimum payments (the minimum percentage consumers with a balance owe each month) and 11% of banks surveyed even reduced them. 

While credit card approval terms were the most broadly tightened by banks, the majority of banks reported stricter approval standards across all major consumer loan types. On balance, more banks tightened standards on commercial and industrial loans than eased them as well. Demand for these loans, on the other hand, weakened at the majority of banks, with the exception of mortgages. Most banks said interest in mortgages was either stronger or the same during the quarter.

“Some of the tightening in standards may have had more to do with controlling the volume of demand above and beyond credit quality concerns,” deRitis said in an email. “With mortgage rates falling to record low levels, many lenders were overwhelmed by requests to refinance mortgages and may have tightened up on qualifications to restrict volume to their capacity.”

Lower minimum payments may be helpful for consumers carrying a large balance and struggling to pay it down right now, but paying only your minimum due is never recommended, since interest compounds. 

Without a clear indication that COVID-19 infections are under control, consumers should expect to face a tougher lending environment, deRitis said. Banks will likely wait for clear signs that the economic downturn is over before relaxing their standards. 

“A sharp, sustained improvement in the number of new daily COVID infections will be an important first step to restoring their confidence but given the risk of subsequent outbreaks they are likely to remain cautious for a while,” deRitis said. 

If you are considering a new credit card or taking out a loan to buy a car or house, make sure you’re already making on-time payments on any existing loans and keep your card balances low. These steps will reflect positively on your credit history.