US consumers are still applying for credit cards despite higher rates

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(Bloomberg) — Consumers in the US continued to crave more credit cards this year even as the Federal Reserve aggressively raised borrowing costs, a shift that cooled demand for mortgages, auto loans and other types of credit, according to research from the New York Fed .

Credit card application rates “remained robust” this year, reaching 27.1% in October, up from 26.5% a year earlier and above the pre-pandemic level of 26.3% in February 2020, according to the New York Fed’s latest credit access study released Monday. In contrast, credit application rates fell slightly this year, following a rebound in 2021.

Demand is strongest from consumers with high credit scores, the study found. Application rates for people with a credit score over 760 were above pre-pandemic levels, while the rate for consumers with a credit score of less than 680 was below pre-pandemic levels.

The Fed is trying to cool the economy and inflation by rapidly raising interest rates, making it more expensive for consumers and businesses to borrow money. Policymakers raised their benchmark interest rate target to a range of 3.75% – 4% this month, up from near zero in March.

The Fed’s interest rate movements are having a clear effect on the housing market, with mortgage rates near 7%, more than double their level at the start of the year. The shift has priced out some homebuyers and demand for new mortgage loans has fallen significantly.

The mortgage refinance application rate has “collapsed” this year, reaching 8.9% in October 2022, compared to 21.4% in October 2021, the report found. The overall mortgage application rate fell from 8.5% in October 2021 to 6.7% in October 2022.

The report found that some consumers are a little more concerned about their future spending. The probability of coming up with $2,000 to cover a surprise expense in the next month fell from 68.2% last year to an average of 67.5% in 2022. But the expectation of having to find $2,000 to cover such expenses , also dropped to an average probability of 32% this year from 33.1% last year.

©2022 Bloomberg LP



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