Home Ownership Increasingly Out of Reach as Credit Rejections Rise, Analysis Shows

February 4, 2025 TruthUSA

‘if credit becomes more and more exclusive, what does this mean for Americans’ hopes of achieving their financial goals?’ Bankrate analyst Sarah Foster said.

Many pillars of Americans’ prosperity, such as owning a home, are slipping out of reach, as loan rejections become increasingly common, a new study finds.

Since the Federal Reserve began raising interest rates in March 2022, about half of those who applied for credit were denied, according to a newly released survey of borrowers and lenders by Bankrate, a financial analytics firm. Conversely, 41 percent of applicants were approved for all the credit lines they sought.

These loan products included credit cards, personal loans, car loans, mortgages, and home equity lines of credit. This is occurring at a time when an increasing number of Americans are relying on credit cards to fund day-to-day expenses such as groceries, gas, and utility bills.

Bankrate analyst Sarah Foster told The Epoch Times that lack of credit availability is also causing many Americans to delay “major financial milestones” such as homeownership, where they can often build up equity for the future.

“The American dream—people bought onto that idea because of the installment loan,” she said. “Rarely do consumers have enough cash on hand to purchase the items that they aspire to own, like homes and cars and appliances.

“The question really becomes, if credit becomes more and more exclusive, what does this mean for Americans’ hopes of achieving their financial goals?”

One major factor causing more Americans to be denied credit is higher interest rates. When lenders calculate borrowers’ creditworthiness, a key factor they consider is the ratio of a borrower’s income to debt service.

Banks and other lenders typically like to see total debt service—including mortgage payments, car payments, and credit card payments—not exceed about 36 percent of total income. Higher interest rates increase debt payments and mean that fewer borrowers will qualify.

Cutting Credit to Fight Inflation

According to Foster, curtailing lending is part of the Federal Reserve’s efforts since 2023 to curtail inflation, both by discouraging borrowers from spending and by discouraging creditors from lending.

The Federal Funds interest rate, set by the Federal Reserve for short-term interest rates, was raised from near-zero in 2021 and 2022 to more than 5 percent in 2023. Long-term interest rates also increased, affecting mortgages and car loans, as lenders sought compensation for the inflation that ultimately wiped out more than 20 percent of the value of the U.S. dollar over the past four years.

According to FreddieMac, a federal mortgage finance organization, the average standard 30-year fixed-rate mortgage was 6.95 percent as of the end of January, while the 15-year floating-rate mortgage averaged 6.12 percent.

Average fixed-rate 30-year mortgage rates (Source: Federal Reserve, Freddie Mac) — Average fixed-rate 30-year mortgage rates Source: Federal Reserve, Freddie Mac

According to Federal Reserve data, interest on 30-year fixed-rate mortgages hit a low of 2.67 percent in 2020 before inflation accelerated. This means that even for an identically priced home, the monthly payment more than doubled simply due to higher interest rates, putting homeownership out of reach for many buyers.

Regarding car loans, according to Bankrate, the current average interest rate for those with a 730 credit score is 6.70 percent for new cars and 9.63 percent for used cars. However, for people with a credit score of 550, the average interest rate is 13.00 percent for new cars and 18.95 percent for used cars.

The average interest rate on credit cards is now more than 20 percent, Bankrate reports.

About one in five Americans (21 percent) reported having a harder time getting credit since the Fed began hiking borrowing costs, Bankrate reported. However, for Americans whose FICO credit scores are rated as “poor” (between 300-579), that percentage increases to 50 percent. Of those whose credit score is “fair” (580-669), 38 percent said credit was harder to get.

Many others said they were not applying for credit because they doubted they would be approved. Others say they are forced into risky alternatives like payday loans to pay for daily expenses.

“Banks and other lenders are constantly mindful of the potential downsides of both the changing economic environment, as well as the risks that people get behind on payments—or worse,” Mark Hamrick, Bankrate’s senior economic analyst, stated in the company’s report. “One way they account for that is for financial service firms to hold on to more of their money.”

A Divergence in Ability to Borrow

According to the report, borrowers who were turned down the most included parents with children under 18 (62 percent), millennials (60 percent), Gen Z (58 percent), and people making less than $40,000 per year (56 percent). The lowest rejection rate was among Baby Boomers, of which a third of credit applications were rejected.

The report also indicated a sharp divergence between Americans with good and bad credit, although both categories reported seeing a tightening in lending criteria.

“Something that was really eye-opening was that almost half of those with very good credit or good credit still faced denial in at least one application over the past 12 months,” Foster said. “But the divergence from the bottom to the top is huge because 64 percent of Americans with credit scores under 670 were denied at least once, compared with 29 percent of those with credit scores of 800 or higher.”

Of those denied credit, 82 percent said it had a negative impact on their finances. One-fourth of those who were turned down for mainstream credit products said they resorted to more expensive alternatives.

“Americans who are rejected for a loan that they had applied for said that they pursued alternative financing like payday loans and cash advances and buy-now-pay-later, and that can just create a cycle of debt that is even more difficult to rid yourself from,” Foster said.

Noting that some payday loans can have annual interest rates as high as 400 percent, she said some lenders are now considering payday loans a red flag when calculating creditworthiness.

Overall, with the cost of issuing credit going up, lenders are simply becoming more selective in who they lend to and more risk-averse. The American Bankruptcy Institute (ABI) reported that, as of November 2024, personal bankruptcies were up 14 percent over November 2023.

“Elevated interest rates, tougher lending terms, and increased geopolitical tensions continue to impact the balance sheets of many struggling businesses and families,” ABI Executive Director Amy Quackenboss said in a statement. “While still below the levels recorded prior to the pandemic, the steady growth in filings reflects the growing financial challenges faced by distressed companies and consumers.”

Bankruptcy filings in November were down 16 percent from October levels, but the ABI report states that filings typically drop from October to November due to fewer business days and the Thanksgiving holiday in November. Bankrate reported that loan delinquencies were also on the rise.

Foster advises that those who have been denied credit have a right to find out why and to get free credit reports from rating agencies like Experian, TransUnion, and Equifax. The reasons could be benign, such as a lack of credit history or errors in calculating credit scores, which can be remedied by contacting the rating companies.

Those who are still struggling with high credit card debt can sometimes get a lower interest rate through a balance transfer or debt consolidation through a home equity loan. However, Foster cautions against borrowing against your house for day-to-day expenses and recommends credit counseling for those who become trapped in debt that they cannot afford.

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