Credit Crunch Crushes Dreams: Millions Face Loan Rejections, NY Fed Reports

Credit is getting harder to come by, especially for auto loans, mortgages and those with low credit scores.

Amid an environment where lenders are tightening, borrowers are feeling discouraged.

The Credit Access Survey released Monday (Nov. 18) by the Federal Reserve Bank of New York showed that demand — as in applications — was on par with previous readings. However, credit applications were rejected at a relatively elevated pace through this year and at the highest rate since the start of the survey in 2013.

“Reported rejection rates for credit cards, mortgages, auto loans, credit card limit extension applications and mortgage loan refinance applications all rose in 2024,” the New York Fed said in a press release that accompanied the data.

Overall rejection rates touched 21%, up 0.9% from 2023’s levels, per the release. Would-be borrowers saw their rejection rates climb and were elevated compared to other applicants with higher credit scores.

Higher Rejection Rates

With a bit more granular insight into the types of loans and their attendant rejection rates, the New York Fed detailed that rejection rates for mortgage applications soared more than 8 percentage points year over year to nearly 21%. Auto loan applications were rejected at an 11.4% rate.

The data, which includes October, found that 32.1% of respondents surveyed by the New York Fed applied and were granted a credit product. This is slightly below the 33.5% that said the same in October 2023. Additionally, 9.5% applied but got rejected, above the October 2023 mark of 9%.

For those with credit scores under 680 (a level that most lenders consider a good score) 22% of consumers with scores below this threshold applied and were approved. That’s below the 27% rate that was seen as recently as mid-year.

The Fed also noted that consumers with a credit score of 680 or less averaged the highest application rate over the past 12 months (38.1%) but are more likely to have been rejected than approved. They are also twice as likely as average (29.5%) to have requested an extension.

As for the mindset surrounding credit and credit access, a sense of discouragement seems prevalent. Thirty percent of respondents to the Fed’s survey said they think they will get rejected versus 29% who expressed a similar sentiment in June of this year.

The average share of respondents who were too discouraged to apply for credit over the past 12 months, despite needing it, because they expected their applications to be rejected, increased to a 2024 rate of 6% from an overall 2023 rate of 5.2%. In October, as many as 22.8% of consumers with scores of 680 responded that they felt discouraged from applying for credit, a spike from 14.7% in June and 17.1% in October 2023.

Lenders Are Tightening

Results from the most recent Federal Reserve survey of loan officers released earlier this month also supported the view of tighter credit card scrutiny with a focus on less-than-ideal borrowers. Bankers were asked how more or less likely they were to approve a credit card application to borrowers in a given credit score category compared with the beginning of the year.

For prime or super-prime borrowers, 18.7% of banks reported they are more likely to approve applications, while for near-prime and subprime borrowers, 27.1% and 32.4%, respectively, reported they are less likely to do so. Fifteen percent of banks reported tightening credit limits and 13% increased minimum credit score requirements for credit card loans.

The downturn in sentiment and approval rates came as the PYMNTS Intelligence report “Average Credit Debt Hits More Than $7,000 for Financially Struggling Cardholders” found that financially struggling cardholders now carry an average balance of more than $7,000 in an economy where more than two-thirds of consumers are living paycheck to paycheck. Consumers who live paycheck to paycheck without financial difficulties averaged an outstanding balance of $5,766. Financially stable cardholders averaged $3,202.

Only 21% of consumers surveyed by PYMNTS Intelligence said their balances decreased. Two-thirds of struggling consumers are hitting their limits, and in some cases, those limits are being reduced.