Tempted to open a new credit card? It might get more difficult. Powell warns of ‘tighter credit conditions for households and businesses’

By Andrew Keshner

The Fed raised its benchmark interest rate by another 25 basis points on Wednesday as it battled inflation.

Federal Reserve Chair Jerome Powell this week gave credence to predictions that the bank will begin to tighten credit standards.

On Wednesday, Powell called the country’s banking sector “healthy and resilient.” But he added a note of caution: “The events in the banking system over the last two weeks are likely to result in tighter credit conditions for households and businesses.”

For households, Powell referred to credit cards and other consumer loans including mortgages and auto loans, said Michael Taiano, senior director, Bank of North America at Fitch Ratings. He said the first line of defense for banks would be issuing fewer new credit cards.

The Fed raised its benchmark interest rate by another 25 basis points on Wednesday as it battled price inflation. (One basis point is equal to one hundredth of a percentage point.)

Earlier this month, Silicon Valley Bank and Signature Bank both failed, and a number of regional banks (KBWR) were reeling from falling share prices and deposit outflows.

Some credit card industry observers predict that card issuers will become more economical in offering offers to consumers.

Reducing credit card limits and ending long inactive card accounts will likely be the first line of defense for banks looking to tighten lending standards, Taiano said in an emailed statement.

On average, people only use about 20% of their card’s credit limit, so cardholders can still shop regardless of changes in credit conditions, Taiano .

“Cutting lines is possible if the economic backdrop deteriorates dramatically,” he said, but he said this was more likely to be a last line of defense to protect against default.

Even before the current banking crisis, a survey of Fed loan officials indicated they had tightened wallets on consumer credit.

In addition to shorter lines of credit, observers tell MarketWatch that banks can have higher credit score thresholds for the lowest annual percentage rate, higher fees, and a shorter length of time before the APR is applied to 0% balance transfer cards.

Credit card interest rates are closely related to the Fed’s benchmark interest rate. The average APR on new card offerings is currently 20.04%, up from 16.34% last March, according to Bankrate.com data

As cardholder rates have increased, so has their debt. Americans accumulated $968 billion in credit card debt through the end of 2022, surpassing the pre-pandemic high of $927 billion, according to New York Fed data.

Tighter access to credit for people and businesses will have economic consequences, Powell also said during a press conference Wednesday. Lenders increasing borrowing costs may reduce the need for a series of rate hikes, he said.

It is too soon to say how stringent lending standards will be and what the economic impact will be, he added. (The Fed has hinted at at least one more rate hike this year)

In the meantime, people should stay focused on minimizing their own debt, said Michele Raneri, vice president and head of US research and consulting at TransUnion (TRU), one of the three major credit reporting agencies.

“In this high-interest rate environment, consumers are advised to continue paying off as much high-interest debt as they can, continue to pay their bills on time, and work to keep their personal financial and credit profiles as strong as possible,” he said.

The average credit card debt carried month-to-month was $5,805 at the end of last year, up from $5,127 year-over-year, according to TransUnion data.

-Andrew Keshner

This content was created by MarketWatch, which is operated by Dow Jones & Co. MarketWatch is published independently of Dow Jones Newswires and The Wall Street Journal.

(END) Dow Jones Newswires

25-03-23 ​​1257ET

Copyright (c) 2023 Dow Jones & Company, Inc.