The Credit Crunch Is Spreading

10/30/2007 12:00 am EST


Jim Jubak

Founder and Editor,

Jim Jubak, senior markets editor for MSN Money, worries that the credit squeeze in mortgages is spreading to auto loans and credit cards, which could be bad news for the economy.

My worst nightmare about the collapse of the subprime-mortgage market is coming true.

The horrors let loose among mortgage borrowers and lenders by falling housing prices have begun to sink their fangs into the market for auto loans and credit cards, too. We're inching dangerously close to the point where consumers run for the hills-taking their wallets and prospects for economic growth in the United States with them.

Altogether, US banks raised their reserves against loan losses by $6 billion in the third quarter from the end of the second quarter of 2007.

But the most stunning news came from the credit card companies. Because these lenders have neither direct nor indirect exposure to the mortgage market, the trends here are an indicator of what's happening with consumer credit outside mortgages. And the news in the third quarter wasn't good.

With evidence of rising delinquency and default rates coming from so many different lenders in so many different markets, the possibility that we're seeing the troubles that borrowers are facing with their mortgages spill over into problems with credit cards and auto loans is disquieting.

These problems could indeed slow the economy in 2008 more than investors now believe is likely.

The biggest danger, though, doesn't come from the consumers running behind on their credit cards and their auto loans. If consumers who are in good shape decide to cut back on spending to reduce their credit card balances, that would take a considerable amount of spending out of the economy.

There is some evidence that this has started to happen. Repayment rates are running about one percentage point above their long-term average, according to And credit card utilization rates-the amount of available credit that consumers actually use-are near 15-year lows.

The banks aren't helping the situation. In the mortgage market, lenders have lowered the amount they'll let consumers borrow against their homes, done away with teaser rates and no-income-verification loans, and raised the credit scores they require to approve a loan. The result is a credit crunch where people who want to borrow today can't-even though they meet the lending standards in effect just yesterday-because lenders have stopped lending.

At the same time as they're sending out fewer card offers to the best prospects, banks have been increasing the rates they charge on cards. By lowering credit limits and making it more expensive and more aggravating to use a credit card, the result is still the same: we're witnessing the very early stages of a classic credit crunch in the credit card market.

It's too early to tell if the crunch will get crunchy enough to take a percentage point or two out of the 1.9% growth rate projected for the US economy in 2008. But in this part of the debt market, the trend is clearly toward less available and more expensive credit. That's never a recipe for faster economic growth.

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