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It’s becoming harder to qualify for a credit card. The rejection rate for credit applications in June increased to 21.8%, the highest in five years.
Many consumers worry we’re entering a “credit crunch.” According to a recent New York Fed survey, 60% of consumers say their ability to get loans, credit cards, and mortgages is harder than it was a year ago.
During a credit crunch, banks get more cautious about lending money. They often offer new credit only to customers with excellent credit scores, who show the lowest risk. Tighter lending requirements mean you may have trouble qualifying for the credit card you want — or for one at all.
The good news: We’re not in a full-blown credit crunch yet. But it’s still essential to understand how a credit crunch could affect your wallet — and how to improve your odds of getting approved for a card.
The Federal Reserve has been raising interest rates since 2022. The hope is that rising rates will reduce borrowing and spending, which can help curb inflation.
Higher interest rates make borrowing money more expensive, says Christopher Stroup, certified financial planner at Abacus Wealth. This includes credit cards.
Previously, when the Fed raised interest rates, credit card interest rates increased. This means borrowers may have to pay more interest on their credit card balances. The average credit card interest rate has surged from 16.34% in March 2022 to a record-high 20.71% in September 2023.
Credit card debt is also at an all-time high, and delinquencies are rising. Some banks fear the situation could get worse if unemployment goes up, says Ted Rossman, senior industry analyst at Bankrate.
This, coupled with recent turmoil in the banking industry, has banks skittish about lending out credit cards to just anyone. In the second quarter of 2023, 36% of lenders tightened their lending standards. This is a significant increase from the second quarter of 2022 when only 2% of lenders tightened their standards.
Tighter lending standards mean it may be harder for consumers — especially those with low or no credit — to get approved for a credit card.
Card issuers look at different aspects of your finances to decide if they should approve your application.
One of the most important factors affecting your approval odds is your credit score. Credit scores range from 300 to 850. A FICO credit score between 670 and 739 is considered a good score. Any score between 740 and 799 is considered very good. Scores above 800 are considered excellent.
The best credit cards on the market today are geared toward individuals with very good or excellent credit. If you have a solid credit score, you’ll most likely qualify for any card you want. You have fewer options if you have poor credit (or even fair credit). Or you may only qualify for cards with high-interest rates and low rewards options.
Your income also affects your odds of getting approved for a credit card. Card issuers want to ensure you earn enough to handle the card payments. A higher income can boost your approval odds, especially for cards with higher credit limits.
Your debt-to-income ratio is another important factor. This ratio compares your monthly debt payments to your income. Higher levels of debt signal to lenders that you have trouble keeping up with your bills. Card issuers may steer clear of approving applicants with a lot of debt, especially during a credit crunch.
If you want to improve your chances of getting approved for a credit card, there are several steps you can take. Here are some ways to boost your approval odds:
While it may be harder to find the right card during a credit crunch, it’s not impossible. Here are some tips to navigate the process.
Credit may be tightening for some consumers, but it’s not too late to build your credit and improve your score to minimize your personal impact.
A good credit score and a solid income can help you qualify for credit in almost any economic condition — with the best rates and benefits.
Opinions expressed are author’s alone, not those of any bank, credit card issuer, or other entity. This content has not been reviewed, approved, or otherwise endorsed by any of the entities included in the post.