Is it Crazy to Apply for New Credit Now?

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Credit Sesame discusses whether it is a good idea to apply for new credit now.

New figures from the Federal Reserve bank of New York show that applications for credit cards have risen over the past year.

Under the circumstances, you might think people are either gluttons for punishment or determined to live dangerously. Interest rates are up and credit card balances are at an all-time high. Taking on additional credit is costly and could be putting borrowers at risk.

And yet, there may be a method to the madness, at least for some people. There are reasons for and against applying for new credit now.

The appetite for credit cards is large

The New York Fed found that applications for new credit in general slowed down last year, but that credit cards were the exception. 27.1% of survey respondents reported having applied for a new credit card account over the past year. That’s up from 26.5% a year earlier, and above the pre-pandemic rate application volume.

This strong appetite for credit cards persists even though credit card debt is already at a high level. Americans are using their cards heavily and they want more.

Reasons against applying for new credit now

There are several reasons why the hunger for new credit cards may not be such a good idea.

Balances are already high

American consumers have already added nearly $150 billion in new credit card debt so far in 2022. That puts total credit card balances outstanding at a record $3,538.7 billion.

With households already struggling to keep up with inflation, that credit card debt just adds to future expenses. At some point, an excess of debt can become a drag on the economy as more money has to go to paying old debts instead of new spending.

Credit is especially expensive now

Consumers have picked an expensive time to increase their debt loads. Rising interest rates have made carrying credit card debt more costly than ever.

The average rate charged on credit card balances has jumped by nearly 2% so far this year. That puts the average credit card rate at 18.43%, the highest recorded by Federal Reserve data going back to late 1994.

A drop in credit score can make high interest rates worse

By applying for new credit, people may be making the interest rate problem worse. Applying for new credit prompts credit checks that may hurt your credit score. Opening a new account can also lower your score.

Consumers with lower credit scores pay higher credit card rates. So, at a time when interest rates are already rising sharply on their own, some consumers are giving those rates an extra push. Adding too much credit or carrying too much debt could cause your credit card companies to raise your rates even more.

Applications for more efficient forms of credit are down

Credit card applications are up, but people have been less inclined to apply for mortgages or auto loans.

What’s unfortunate about that is that mortgages and auto loans are more efficient forms of credit than credit cards. They have much lower interest rates. So, the numbers suggest that people are not only applying for new credit at a bad time, but they are applying for the wrong type of credit.

Reasons to apply for new credit now

Does the appetite for credit cards in this environment mean people have completely lost their senses? Perhaps not. While there’s cause to be concerned about the volume of new credit card applications, there are reasons it can make sense for some people.

Credit scores remain high

The average FICO score for U.S. consumers has risen steadily over the past decade. It now stands at 716, which is 26 points higher than it was ten years ago.

Naturally, the best time to apply for credit is when your credit score is in good shape. You have a better chance for getting approved and qualifying for more favorable terms.

The application rate is rising among people with excellent credit

Drilling down a little further into the New York Fed’s numbers, it’s interesting to see who is applying for credit cards at this time.

Over the past year, the application rate for new credit cards has risen among people with credit scores of 760 or better. The application rate has fallen for people with lower scores.

In other words, the rise in demand is being fueled by people who don’t currently have credit problems. They are likely to qualify for the most favorable terms. These are the consumers in the best position to handle new credit in 2022.

Rejection rates are down

Application rates are up for credit cards and down for other types of credit. Rejection rates for different types of credit might explain why.

Rejection rates for mortgages and auto loans have increased this year. Meanwhile, the rejection rate for credit card applications have decreased this year.

By choosing to apply for credit cards, it appears people are choosing the form of credit where their chance of approval is greatest.

Changing rates alter competitiveness

As credit card rates have been changing rapidly, it affects the competitiveness of different cards. The card that offered the best terms a year ago may no longer be the most attractive choice.

So, this may be a good time to shop around for a better credit card deal. It could counteract part of the impact of rising credit card rates.

Balance transfers can fight high interest rates

Another good reason to apply for a new credit card these days is to take advantage of a low-interest balance transfer card.

Used as part of a debt reduction program, the right balance transfer card can save you some of the interest charges you’re paying on your existing credit card balances.

At a time when both balances and credit card rates are at high levels, that’s a type of application for a new credit card that can make perfect sense.

New accounts adjust credit utilization

Applying for new credit and opening new accounts can cause short-term harm to your credit score. However, increasing your total credit limit available could help in the long run.

Credit utilization is an important factor in credit score. It measures the percentage of available credit that you’re using. The closer you are to maxing out your credit limit, the worse it is for your credit score.

Raising the amount of credit you have available is one way of lowering your credit utilization ratio. That can help your credit score – as long as you don’t simply raise your balance along with your limit.

In essence, applying for a new credit card may be risky or beneficial, depending on your circumstances. these days. Make sure it’s right for you before doing anything crazy!

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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