Another Sign of an Economy Bouncing Back: Lenders Saying ‘Yes’
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In another clear sign that the nation's economy is returning to pre-COVID levels of activity, the number of new credit accounts being opened is on par with where it was before the pandemic set in.
U.S. consumers were approved for 217 million new credit accounts in the third quarter of 2021, according to data released this week from the Federal Reserve Bank of New York. That about matches the number of approvals during the first quarter of 2020, and it's a good sign for consumers looking to borrow.
Consumer credit approvals declined sharply after the onset of the pandemic, particularly for borrowers with less-than-good credit. That left many people with limited or no access to credit just when they needed it most — as employers laid off workers amid pandemic shutdowns. Typically, banks are less likely to lend across all categories of consumer loans during economic downturns, but are more likely to lend when the economy is doing well.
"As we hit the mid-point of 2021, we saw a resurgence across all sectors, with auto, credit card, personal loan and mortgage showing signs of life," according to a statement from TransUnion, one of the three major credit bureaus, as part of its 2021 Quarterly Credit Industry Insights Report, released in September 2021. "Financial institutions are returning to lending and extending credit, and originations were up in both mortgage and auto, with personal and credit cards narrowing the gap."
Tight lending standards are easing
In March 2020, the unemployment rate was 4.4%, according to the Bureau of Labor Statistics. A month later, it had soared to 14.8%, the highest rate since the government began officially tracking unemployment in 1948.
"A consequence of this dramatic rise was an equally immense slowdown in loan originations," TransUnion noted in its 2021 Quarterly Credit Industry Insights Report released in May 2021. "Some lenders tightened their standards and consumers held back on opening loans in the first months of the pandemic."
Federal Reserve surveys of bank loan officers in April and July 2020 found that credit standards had tightened almost immediately. Limits on credit cards were reduced while approval requirements got stricter. With auto loans, the maximum loan maturity or the minimum credit score required to obtain a loan were tightened as well.
The new Fed data shows how much that has since eased up. A look at offers available in the credit marketplace shows something similar. Take balance transfer credit cards, which have returned to the market in force over the past several months. These credit cards allow consumers to move their high interest debt to a card with an introductory 0% APR period, which can allow them to save hundreds of dollars in interest and pay down their debt more quickly. Balance-transfer offers became very hard to find in summer 2020. These days, most major banks are again offering cards with 0% APR offers on balance transfers for six to 18 months.
Also noteworthy is how quickly the pace of credit approvals has bounced back. After the 2007-08 financial crisis, commercial banks saw negative loan growth for nearly four years, according to the Federal Reserve Bank of St. Louis. Compare that with the roughly year and a half it took lending to return to more normal levels after the onset of the pandemic.
Then again, the 2020 recession lasted two months, according to the National Bureau of Economic Research, which makes it the shortest U.S. recession on record.
What you should know about getting a new credit account
The new report is good news for people who need access to credit. But you still may want to temper your expectations. While banks are lending again, they’re still being cautious in how much they lend, and to whom.
Expect lower credit lines
"To meet consumer demand, issuer supply has broadly returned to market, with uncertainty being managed through lower credit line assignments," TransUnion said in a statement around its Q2 2021 Quarterly Credit Industry Insights Report.
Higher credit lines help you keep your credit utilization low. A key factor in credit scores, utilization measures how much money you owe in relation to the total amount of credit available to you. The lower your utilization, the better. (Aim to keep your balance under 30% of your total available credit).
Banks still prefer lower-risk customers
And taking care of your credit scores is also key to accessing this newly available credit.
"Card issuers continue to be prudent with the risk mix of consumers and have shifted credit line growth toward lower-risk consumers," TransUnion said.
Lenders use credit scores to estimate how likely you are to repay money you’ve borrowed. While each lender has its own means of determining "good" or "bad" credit, scores of 720 and higher are generally considered excellent credit and lowest-risk.
Among the ways to protect and improve your credit scores: Pay down debts and pay bills on time. If you’re having trouble establishing credit, a good way to start is by becoming an authorized user on a trusted friend’s or family member’s credit card or by applying for a secured credit card, which is less risky for the bank because your credit limit is backed by a deposit.
Just keep in mind that even an excellent credit score isn't a guarantee that you’ll be approved for credit — or for as much credit as you want.
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