Content provided by Bankrate.com. New York Post and its content partners earn compensation from the affiliate companies that appear below. This content does not include all available financial offers, and compensation may impact how and where links appear in the content.
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.
Why is it getting harder to get approved for credit?
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.
How your finances affect your card approval odds
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.
How to improve your chances of getting approved for a credit card
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:
- Check your credit score: Improving your credit score is the best way to improve your approval odds, says Rossman. Checking your score will give you a better understanding of where you’re at.
- Review your credit report: You can get your credit report for free from various credit bureaus. Review it for any errors that could be negatively impacting your score.
- Start building a positive credit history: If you have a limited (or no) credit history, build it up before applying for a credit card. You can sign up for a secured credit card or become an authorized user on someone else’s card. Or, you can sign up for a credit-building tool like Experian Boost, which helps you build credit by counting payments on everyday bills like rent and utilities.
- Pay your bills on time: Regularly paying your bills on time shows responsible financial behavior, while late payments can hurt your credit score and approval odds. Set up reminders or automatic payments to ensure you don’t miss any due dates.
- Lower your existing debts: Reduce your debt as much as possible. Lenders are more likely to approve you if your debt-to-income ratio is low.
- Keep your credit utilization low: Your credit utilization ratio, or the amount of available credit you use, affects your credit score, says Rossman. A low ratio shows lenders you can manage credit responsibly. Aim to use only a small portion of your credit line, ideally below 30%. If you have high balances on your credit cards, try paying them down before applying for a new card.
- Include your income on applications: Make sure to include all eligible sources of income in a new card application, says Rossman. This includes your salary and any bonuses, freelancer income, investment income, and more.
Finding the right credit card for you
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.
- Assess your needs: Determine what you primarily need a credit card for. Are you looking to consolidate debt, build credit, or earn rewards on everyday expenses? This will help you choose the right type of card.
- Research your card options: Some issuers may have specific cards designed for those with lower credit scores or limited credit history. These cards often have more lenient approval requirements.
- Check for introductory offers: Look for credit cards with introductory 0% APR on balance transfers or purchases. This can be beneficial if you want to consolidate debt or manage expenses without incurring interest charges during the introductory period.
- Understand your approval odds: Know which credit cards you’re likely to be approved for based on your current credit score and profile. Some card issuers allow you to check if you’re pre-approved for their cards without impacting your credit score. This can save you time and minimize potential credit inquiries.
- Consider a secured credit card: With a secured credit card, you provide a deposit as collateral, which reduces the risk for the issuer. Because of this, secured cards often offer instant approval and can help you build or rebuild credit over time.
- Use a card comparison tool: Tools like CardMatch let you see which cards you may qualify for based on your credit score, income, and other factors. The CardMatch tool is free and won’t affect your credit score.
The bottom line
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.