Credit Card & Auto Loan Approval Standards Tighten: 2020 Outlook

Banks toughened their approval criteria for credit cards and auto loans during the fourth quarter of 2019, according to the Federal Reserve’s latest survey of senior loan officers. And they expect that tightening of lending standards to continue in 2020 — particularly for credit card, auto and most categories of business loans.

The banks that said they’ve already set tougher lending standards or expect to in 2020 told the Fed in its survey that they’re worried. Specifically …

• They’re afraid borrowers won’t be able to repay loans.
• They expect the value of collateral to drop.
• They’re not willing to take on as much risk.

Lenders surveyed said they’re mostly concerned about loans and borrowers associated with credit scores that are below the “prime” score range — meaning below 660.

Want to know more?

• What’s going on with bank lending standards?
• What can you do?

What’s going on with bank lending standards?

As the chart above shows, banks have responded to economic conditions by either drastically tightening their credit card lending criteria (during a recession — Q1 2009), or loosening standards as the economy improves (Q1 2011).

In the third quarter of 2019, banks cited concerns about the economy as a big reason for tightening of some lending standards.

And fourth-quarter 2019 data from the Federal Reserve Bank of New York showed U.S. consumer delinquencies, or the percentage of people who couldn’t repay their loans, rose compared to the third quarter. In its latest notes from January, the Fed said there had been moderate economic growth and a strong labor market but some weakening in business investments and exports.

So it makes sense that banks are being more cautious.

What can you do?

Based on this latest survey from the Fed, getting a credit card or an auto loan in the near future might be tougher for some people.

If you’re thinking about applying for a credit card or auto loan in the next few months, take some time to …

• Understand your credit scores. Learning what factors affect your credit scores can help you address your financial habits and work on building your credit.
• Keep a budget. Understanding your income and debt by creating a budget may help you figure out how to reach your financial goals.