Since June 2020, the likeliness of a credit card application being declined surged from 26% to 35.1% in October, according to data published on December 21, 2020, by N.Y. Fed. This high turndown rate is the largest on record since 2014.
The decrease is undoubtedly not a surprise, as we continue to contend with the economic impact of COVID-19. According to the Conference Board, consumer confidence dropped in November from 101.4 to 96.11 on the index. And, according to the Fed’s Senior Loan Officer Opinion Survey (SLOOS), lenders also feel queazy about lending.
Although the confidence numbers imply that both lenders and borrowers are reticent about debt, the telling tale is in the application volume because it influences downstream credit growth. From the N.Y. Fed:
- The application rate for credit cards fell by 10.6 percentage points (or 40%) since February 2020 to 15.7%, a new series low. The decline was broad-based across age and credit score groups.
- The application rate for credit card limit increases dropped by 6.6 percentage points (or 48%) since February to 7.1% in October, the lowest level since the start of the series in October 2013. The decline was broad-based across age and credit score groups.
- The reported rejection rate for credit card limit increases rose by 11.7 percentage points (or 46%) to reach 37.1% in October 2020.
When you tie the decrease in new accounts with the slide in revolving debt, it suggests that, in addition to higher anticipations in credit losses during 2021, there will be an interest revenue issue in U.S. credit cards next year. As of the latest Federal Reserve Report, revolving debt is down more than from a 2019 peak of $1.09 trillion to $979.6 billion in October 2020.
This decrease represents $75 billion in revolving debt and an average assessed interest rate of 16.43, or a whopping $12.3 billion in reduced revenue.
Look forward to closing the books on 2020 and stepping into 2021!
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group