Fed: Credit Rejections Rise While Fewer Consumers Are Able to Handle Emergency Expenses

As reported by the Federal Reserve on Monday (Nov. 20), demand for new credit is declining.

Rejection rates for those people seeking new credit are on the rise.

And the percentage of consumers who can handle an unforeseen, $2,000 expense is waning, too.

The data in the most recent “Survey of Consumer Expectations Credit Access Survey,” found that there was a “notable” decline in overall credit through 2023, where application rates of 41.2% were down from 44.8% last year. At the same time, rejection rates were higher, at 20.1%, a marked increase over the 18% seen in 2022. As measured through the year, the application rate for credit cards was 26%, 0.7% lower than last year. Drill down a bit, though, and October notched an upswing, at 29%, up from 27.1% in October of last year. The average rejection rate for credit card applications during 2023 increased by 1.1% to 19.6%.

Increasing Card Limits

As for the cards that are already in hand, the Fed estimated that the application rate for credit card limit increases “increased somewhat,” during 2023, at 17.8% in October 2023, compared to 11.2% in October 2022. The rejection rate for credit card limit increases declined to 30.9% in 2023 from 35.3% in 2022.

“The proportion of respondents who reported that they are likely to apply for at least one type of credit over the next 12 months decreased notably, falling to 25.1% in October 2023 (25.9% for 2023 overall) from 28% in October 2022 (and 26.7% for 2022 overall). The decrease was driven mostly by those with credit scores between 680 and 760 and respondents aged 60 and older,” wrote the Fed.

The read across for credit cards at least is that consumers are trying to get as much mileage as they can out of the cards they already have on hand. The decline in new applications hints at a recognition that lending standards are tightening, and that juggling the monthly obligations already extant is challenge enough. 

The average likelihood of applying for a credit card over the next 12 months, as estimated by the Fed, declined to 12.7% in October 2023 from 13.6% in October 2022.

Indeed, PYMNTS’ Intelligence has found that as 2023 progressed, one-third of cardholder increased the share of their expenses paid via credit cards, while only 15% reduced their credit card spending. As many as 45% of consumers revolve their balances. 

The total amount of credit card debt outstanding has now topped $1 trillion.

Financial Fragility?

Amid the pullback in credit applications and as rejection rates remain lofty, the Fed also detailed that — as measured by the ability to pay for an unexpected $2,000 expense — financial “fragility” is becoming more prevalent. 

The percentage of households able to handle that level of expense decreased to 65.8% in the October reading, down from 67.5% in 2022 and a percentage that is at a series low. 

Separately, PYMNTS estimated that consumers’ average emergency expense is now approximately $1,700, reflecting year-over-year growth of 16%.