This move by the Federal Reserve is making life harder for the average American

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The Federal Reserve not only controls the money supply but also controls the interest rate that banks and other financial institutions charge customers.

Having a line of credit is what makes it possible to expand businesses and get people into homes.

But this one move by the Federal Reserve has just made life harder for the average American.

Loan approval rates drop

Almost two years after the Federal Reserve began its spate of aggressive rate hikes, Americans are now having a difficult time getting approved for loans and other financial products.

In a new survey from Bankrate, a staggering 50% of loan and other financial product applicants have been denied since the Fed began raising rates starting in March of 2022.

Aside from loans, credit card applications have also been rejected at high rates, with 14% of Americans reporting that banks have denied them a new credit card, and another 6% were denied a balance transfer card.

Other consumers say they were denied a credit limit increase on a card they already had (11%), a personal loan (10%), car loans or leases (9%), insurance (8%), and mortgage loans (5%).

The denials are likely due to banks tightening their lending standards after interest rates started to rise.

Fed policymakers have raised interest rates quite sharply over the last two years, approving 11 rate increases over that span with the hope of crushing inflation while cooling down the economy.

In just 16 months, interest rates went from close to zero to over 5%, which is the most rapid pace since the recession of the 1980s.

The Fed’s theory is that raising interest rates that are passed on to consumers and businesses will slow the economy by forcing employers to pare down spending.

Those higher rates have pushed the average 30-year mortgage rate over 8% for the first time in decades, and borrowing costs for other products like auto loans, credit cards, and home equity lines of credit have also spiked significantly.

Lenders are getting “pickier”

According to Sarah Foster, an analyst at Bankrate, “One of the ways higher borrowing costs wrestle inflation is by slowing the flow of credit to households and businesses. Lending doesn’t stop, but financial firms grow pickier about who they approve for a loan, assessing factors such as income, outstanding debt and payment history.”

As credit conditions tighten, banks raise their lending standards, which can make it more difficult for many Americans to be approved.

Some borrowers might have to agree to stricter terms like higher-than-average rates so that banks can reduce their financial risk.

The lower number of loan approvals leads to less spending on big-ticket items by consumers and businesses.

The percentage of Americans with lower credit scores who were denied a loan or other financial product is “substantially” higher per the recent data.

Approximately 73% of people with a “poor” credit score between 300 and 579 have been denied, compared with 63% of people with a “fair” credit rating between 580 and 669 and 55% of people with a “good” credit rating of between 670 and 739.

Informed American will keep you up-to-date on any developments to this ongoing story.