A new study has found that many pillars of the American Dream, such as homeownership, are becoming increasingly out of reach as credit rejections become more common.
The latest survey by financial analysis firm Bankrate on borrowers and lenders revealed that since the Federal Reserve began raising rates in March 2022, approximately half of credit applicants have been denied. Only 41% of applicants received all the credit limits they applied for.
These loan products include credit cards, personal loans, auto loans, mortgages, and home equity lines of credit. This trend comes at a time when more and more Americans rely on credit cards to cover daily expenses like groceries, gas, and utilities.
Analyst Sarah Foster from Bankrate, in an interview with The Epoch Times, stated that the decline in credit approval rates also leads to many Americans delaying “major financial milestones,” such as homeownership, which is often a crucial way to build future assets.
“The American Dream – the idea that people accept this idea due to the existence of installment loans,” she said. “Consumers rarely have enough cash to make a one-time purchase of items they want, such as homes, cars, and appliances.”
“The real issue is, if access to credit becomes increasingly difficult, what does that mean for Americans’ hopes of achieving financial goals?”
One major factor leading to more Americans being denied credit is higher interest rates. When lenders assess borrowers’ creditworthiness, a key factor is the ratio of borrower income to debt repayment.
Banks and other lenders typically prefer total debt repayments (including mortgages, auto loans, and credit card payments) not to exceed 36% of total income. Higher rates increase the cost of debt repayment, meaning fewer borrowers qualify for loans.
According to Foster, reducing lending since 2023 is one of the Federal Reserve’s measures to control inflation, aimed at curbing borrowers’ spending and reducing lending.
The Fed’s Federal Funds Rate – the short-term rate, rose from near zero in 2021 and 2022 to over 5% in 2023. Long-term rates also increased, affecting mortgages and auto loans as lenders seek compensation to offset inflation over the past four years that eroded the value of the dollar by over 20%.
FreddieMac data shows the average rate for a 30-year fixed-rate mortgage was 6.95% as of the end of January, while a 15-year adjustable-rate mortgage averaged 6.12%.
According to Fed data, the rate for a 30-year fixed mortgage hit a low of 2.67% in 2020 before inflation accelerated. This means that even with the same home price, monthly payments doubled due to rising rates, making homeownership more challenging.
For auto loans, Bankrate data shows that borrowers with a credit score of 730 had an average loan rate of 6.70% for new cars and 9.63% for used cars. For borrowers with a credit score of 550, the average rate was 13.00% for new cars and 18.95% for used cars.
The average credit card interest rate now exceeds 20%, according to Bankrate reports.
About one-fifth of Americans (21%) said that obtaining credit has become more difficult since the Fed started raising rates. This percentage rises to 50% for Americans with FICO credit scores rated as “poor” (300-579), and 38% for those rated as “fair” (580-669).
Many people reported not applying for credit because they might not be approved. Some said they were forced to turn to riskier options like payday loans to cover daily expenses.
“Banks and other lenders are always monitoring changes in the economic environment and the risk of borrowers defaulting or even defaulting,” said Mark Hamrick, senior economic analyst at Bankrate in the report. “One way financial service companies respond to this situation is by holding more funds.”
The report shows that the highest denial rates for loans were among parents with children under 18 (62%), millennials (60%), Gen Z (58%), and those with an annual income under $40,000 (56%). Baby boomers had the lowest rejection rate, with approximately one-third of credit applications denied.
The report also indicates a significant divergence in Americans’ credit conditions, with the impact of tightening credit standards varying among those with good and bad credit.
“An astounding finding is that even among those with credit rated as ‘good’ or ‘very good,’ close to 50% have had at least one application denied in the past 12 months,” Foster said. “But there is a significant gap between lower and higher credit scores – among Americans with scores below 670, 64% have been denied credit at least once, while for those with scores above 800, the rate is only 29%.”
Among those denied credit, 82% stated that it had a negative impact on their financial situation. A quarter of those denied loans said they had to turn to more expensive alternative credit products.
“Americans denied credit reported resorting to alternative financing such as payday loans, cash advances, and ‘buy now, pay later’ options, which could lead to a more difficult debt cycle to break free from,” Foster said.
She noted that some payday loans have annual interest rates as high as 400%, so some lenders now view payday loans as a negative signal in credit evaluations.
Overall, as the cost of lending rises, lenders are becoming more cautious and stricter in their borrower selection. The American Bankruptcy Institute (ABI) reported that as of November 2024, personal bankruptcy filings had increased by 14% compared to November 2023.
“High rates, stricter lending conditions, and ongoing geopolitical tensions continue to impact the financial situation of many struggling businesses and households,” said ABI Executive Director Amy Quackenboss in a statement. “Although bankruptcy filings remain below pre-pandemic levels, the increasing filings reflect the increasingly severe financial challenges faced by businesses and consumers.”
While the number of bankruptcy filings decreased by 16% from October to November, the ABI report noted that filings typically decline from October to November due to fewer working days and the Thanksgiving holiday. Bankrate also reported an increase in loan default rates.
Foster advised individuals denied credit to understand the reasons and obtain free credit reports from credit rating agencies such as Experian, TransUnion, and Equifax. Reasons for denial may include insufficient credit history or errors in credit score calculations, which can be corrected by contacting rating agencies.
For those still facing high credit card debt, balance transfers or home equity loans can help lower rates. However, Foster cautioned against mortgaging homes for daily expenses, and recommended seeking credit counseling services for those struggling to repay debts.