Consumers turn to credit limit increases for additional liquidity as rejection rates drop

As banks continued to tighten lending standards in the third quarter of 2023, one area of optimism for consumers was a decline in rejection rates for credit card limit increases.

In 2023, the application rate for higher credit limits rose to 14.4 percent, from 11.5 percent in 2022. At the same time, the rejection rate for limit increases dropped to 30.9 percent from 35.3 percent in 2022, according to the New York Federal Reserve.

The New York Fed also reported greater interest in accessing higher card limits from those with credit scores below 680 in 2023, compared to 2022. As average rejection rates for credit card applications for 2023 edged up to 19.6 percent (from 18.5 percent in 2022), these consumers in particular may be finding it harder to get new credit cards under tighter lending conditions.

Americans hard-pressed to make ends meet

Higher credit limits can be helpful in today’s climate, in which higher levels of inflation following the pandemic have eaten away at consumers’ purchasing power.

Nearly a third of consumer households surveyed by Bankrate in September 2023 reported having less money in emergency savings when compared to the start of the year. More than half of those households pointed to inflation as the reason for not being able to boost their emergency savings stash, and about two-thirds said they didn’t expect their financial situation to improve in 2024.

Further, access to credit remains difficult for many consumers, according to a recent Consumer Financial Protection Bureau report on “making ends meet in 2023.” Of the 41.5 percent of consumers who said they applied for credit in 2023, 36.6 percent of these applicants were rejected or didn’t get as much credit as they applied for. Another 23.8 percent said they didn’t bother to apply for credit because they expected to be turned down.

This difficulty in accessing credit comes as banks report tightening their lending standards. The Federal Reserve reports that banks were more stringent in approving applications for credit cards over the third quarter of 2023, especially for applicants with lower FICO scores, when compared to the start of the year.

Credit card balances continue to rise

Even as banks have continued to make it harder for consumers to be approved for credit cards in an uncertain economic environment, outstanding credit card balances have risen. The Federal Reserve reported in its November consumer credit report that revolving credit outstanding — which mostly comprises credit card balances — gained 17.7 percent on an annualized basis, rising $19.1 billion over the month to a total of $1.314 trillion in outstanding debt.

It may be that November’s increase in outstanding revolving credit was tied to a rise in holiday spending. The government reports that retail sales rose 0.6 percent over the month in December (4.8 percent from December 2022) and 0.1 percent in November (3 percent over the year). Online sales also rose 1.2 percent over the month in November and 1.5 percent in December.

Ian Shepherdson, Pantheon Macroeconomics chief economist, surmised in his January 10th daily economic commentary email that the boost in revolving credit for November could signal an upward trend in credit card spending. This may be the result of people exhausting the savings they accumulated during the pandemic, causing them to now turn to credit cards to meet expenses.

The CFPB report on making ends meet supports this assertion, finding that credit card borrowing ability for consumers increased in July 2023 — and that, for the more than 80 percent of households that own a credit card, most of the borrowing ability they can quickly access is through their credit card.

Combined with banks’ more lenient approach to approving card limit increases over new cards, it seems likely that consumers are increasingly turning to higher credit limits to better cope with rising prices and dwindling savings.

Should you request a higher credit limit?

Applying for a higher credit limit from your card issuer may be an easier way to boost your available credit than getting a new credit card from a different issuer. As for the impact on your credit score, you’ll want to ask whether your issuer requires a hard credit inquiry for approval. If so, it could temporarily ding your credit score.

One benefit to a higher credit limit, however, is that it can lower your credit utilization ratio. This rate is the percentage of available credit you’re using, and experts generally advise keeping it under 30 percent. If you get a higher credit limit and can avoid increasing your spending, it should benefit your credit score overall.

Unlike applying for a new credit card, requesting a higher credit limit won’t affect the overall age of your credit accounts, which makes up 15 percent of your credit score. Moreover, it can be easier to manage your finances and stay organized when you have fewer credit cards.

Consider your financial options

An April 2023 Bankrate survey found that for 52 percent of Americans, money is a significant source of stress that affects their mental health, compared to 42 percent who felt that way in the previous year.

If you tend to carry a credit card balance from month to month, that could be stressful considering average interest rates on cards carrying a balance are at 22.75, according to the Federal Reserve.

If you have good credit, you may benefit from consolidating your debt with a balance transfer credit card. The best balance transfer cards can provide a break of 15 months or more from interest charges by offering a 0 percent introductory APR, helping you to manage and eliminate debt more quickly. Or consider using a personal loan to consolidate your card debt, often at a lower interest rate than credit cards.

If you find yourself overwhelmed and unable to manage your debt, reach out to a nonprofit credit counselor that can help you create a debt-payoff plan and budget to pay down what you owe.

The bottom line

As banks have tightened their lending standards for credit card accounts — particularly for those with lower FICO scores — more consumers may be turning to higher credit limits to boost their available credit and create additional liquidity in their finances.

If you’re approved for a credit limit increase, take care to use the additional available credit wisely. Considering the steep interest rates credit card issuers charge, there may be better ways to manage your financial situation if you tend to carry a card balance.