During the pandemic, your credit card usage may have declined. With regular stimulus checks coming in, most Americans used less credit last year. Now that credit card usage has surged, experts suggest that credit scores across the country might lower.
If you typically use credit cards for everyday bills, check out the five ways that experts think that credit card use is expected to increase in 2022 and what this might mean for your credit score.
1. Access to New Credit Cards Could Be Limited
If you tried to get a new credit card recently and failed, you’re not alone. The fluctuating pandemic economy has made it much harder to obtain a credit card.
Experts at the Federal Reserve found that credit card approval rates plummeted dramatically from 45% in January 2020 to barely 30% in May 2020.
If the economy is struggling, then many Americans are struggling. As a result, credit card companies have become more cautious about issuing approval for new credit cards. Lenders do not want to give cards to people who can’t pay off their debt.
According to the government experts at Consumer Finance, more people have been making new credit inquiries since May 2020. However, despite the rise in credit card inquiries and usage, the numbers still fall below pre-pandemic levels.
2. Credit Card Limits May Be Reduced
Using a survey from CompareCards.com, data shows that not only does increasing credit card usage in a pandemic economy make it harder to get a new card, but you may also find your credit limit cut if you do get approved.
Since many credit card companies remain cautious about risk, some limit how much consumers can charge. Others are pulling back on balance transfers and other credit perks until they see how increased usage impacts the overall picture.
If your credit card limit gets shorter while your charged expenses get larger in 2022, increased credit card usage can drop your credit score dramatically.
3. Higher Credit Balances Signal Lower Scores
This might seem obvious, but if you regularly carry a high balance on your credit card, you will not just find it harder to get a new card or extend your line of credit. You will also see your credit score drop.
Think of it like a reverse scale: The higher balance you place on one side of your financial scale, the lower your credit score.
Credit card companies see consumers with recurrent high balances that are not paid off each month as an increased risk. Some companies may even cancel cards if they observe explosive usage, missed payments, or inappropriate utilization.
4. Increased Usage Impacts Credit Limit Utilization
According to the Federal Reserve, credit card inquiries have picked up again since March of 2021. Credit card usage also went up 1.7% between September and October 2021.
This signals that Americans are more willing to put their purchases on plastic.
- A great way to keep your credit score from falling off a cliff is to keep your credit card utilization low.
- For example, if you have a $10,000 credit limit and charge $5,000 to your card, you will have used 50% of your total credit limit.
- A good rule of thumb is to keep your credit utilization at 30% or less.
While you will want to ensure that you do not put a ton on multiple credit cards, spreading out expenses over several cards can help keep individual credit card utilization in a healthy zone.
5. Credit Card Companies Are Offering More Perks
Despite the risks posed by the pandemic and the cautious optimism expressed in approval rates and credit limits, many companies recognize that Americans have spent more responsibly over the past two years.
Many lenders stopped offering generous sign-up offers during the pandemic that included welcome bonuses or extended periods of 0% interest.
Companies are actively wooing potential consumers with travel perks, excellent terms on balance transfer cards, or cashback rewards.
This signals a shift in lenders’ confidence that consumers’ financial resources will finally catch up to increased usage.
Over the past two years, most Americans have used plastic more responsibly. This primarily resulted from cautious spending during periods of economic uncertainty and the extra financial boost caused by regular stimulus checks.
With credit card usage rising again, consumers might see their credit scores drop if they start charging large purchases. In addition, you might see an impact on your credit card score if you take out multiple new cards that require a hard credit pull. Finally, credit scores can also dip if you utilize a high percentage of your credit limit.
Despite experts’ forecast that increased credit card usage could cause your credit score to plunge, companies are demonstrating optimism about consumers’ usage by flooding the market with enticing new offers. However, it remains to be seen if increased usage will significantly drop credit scores for Americans and if the economy’s uptick has delayed rather than averted risk.