A ‘Fair’ Credit Score Didn’t Cut It for Your Loan? You’re Not Alone

The standards for loan approval have become more stringent, as revealed in a recent October survey, marking a continuation of a year-long trend. Banks are increasingly turning down credit card and car loan applications from individuals with credit scores in the ‘fair’ range of 620-680. Amid fluctuating economic indicators, loan officers are growing wary, fearing defaults in case of an economic slowdown. These stricter lending measures could complicate matters for borrowers and potentially dampen economic growth.

Facing an uncertain economic future, banks are becoming more selective in their lending decisions, rejecting an increased number of credit applications from those with average credit scores. Data released on Monday indicates a rise in criteria for both businesses and individuals seeking loans in late September and early October. Applications from people with credit scores between 620-680, classified as ‘fair’ by lenders, were less likely to be approved, according to a survey conducted by the Federal Reserve among senior loan officers.

In addition, banks are charging higher interest rates relative to their own funding costs and reducing some credit limits among other strategies. With the economic future remaining uncertain, lenders have grown increasingly worried about loan repayment. This could trigger a chain reaction where reduced lending further drags the economy down, as noted by economists.

“Banks are definitely tightening their lending belts,” comments Oren Klachkin, a financial market economist at Nationwide. He adds, “It’s irrefutable that credit conditions influence economic activity… we anticipate that 2024 will be marked by considerable restrictions on spending and hiring due to tightened credit.”

This is the third consecutive quarter in which the survey, conducted among 62 local and 19 foreign banks, reported stricter lending standards, making credit less accessible. Concurrently, the Federal Reserve’s efforts to curb inflation through interest rate hikes have escalated borrowing costs for mortgages, credit cards, and various other loan types linked to the benchmark fed funds rate.

In an attempt to rebalance supply and demand and suppress ongoing inflation, the Fed has been raising borrowing costs, aiming to slow economic growth and curb borrowing and spending. While certain economic indicators suggest the economy has withstood these increases, and even shown signs of growth acceleration in recent months, contradicting predictions of a recession, other factors like soaring interest rates, a slowdown in factory orders, and growing consumer pessimism hint at a potential slowdown.

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