America's Credit Catastrophe

The Consumer

No one should be shocked to find out that spendthrifts with a wallet full of maxed-out credit cards are having a tough time getting loans these days. But even responsible consumers—the ones who follow such formerly passé advice as paying their bills on time each month and buying only houses they can afford—are starting to notice higher interest rates and less access to credit.

When Amanda Tossberg, a public relations consultant in Nashville, went to buy a 2008 Mazda Speed3 in late June, she was shocked when the dealer offered her and her husband close to a 10 percent interest rate on a $13,000 loan. "I said, 'What's the point of spending all these years working to build good credit if you're not going to get rewarded for it?' " recalls Tossberg, who says her husband's credit score is in the 800s. She told the salesperson such a high interest rate was a deal-breaker, and after some back and forth, he offered her a rate of 4.9 percent over 60 months.

About two thirds of banks told the Federal Reserve that they tightened their lending standards for consumer loans between May and July. Many student loan providers had already done so earlier this year, and several companies, including student loan provider My Rich Uncle, recently stopped offering private loans altogether. Matthew Towson, a spokesman for Discover, says the credit card company has reduced its marketing in high-risk areas and may offer consumers in those regions lower credit limits.

Bank of America has similarly heightened its credit standards and is now more likely to refer some card applications, especially those from areas of the country experiencing more economic stress, such as California and Florida, for review by credit specialists. At the same time, the average interest rates on credit cards have remained virtually unchanged at around 12 percent, according to LowCards.com, suggesting current cardholders have not experienced any major shifts.

Indeed, it's the people with sketchier credit backgrounds who are getting squeezed. Jesse Toprak, executive director of industry analysis for car site Edmunds.com, says some customers with poor credit are now paying upwards of 20 percent for car loans. Lenders have also started requiring larger down payments; the average for new vehicles climbed to $3,000 in September, up from $2,200 earlier this year.

Consumers close to foreclosure are also under extra duress, says Robert Strupp, director of research and policy for the Community Law Center, because banks have been reluctant to renegotiate mortgage terms while they wait to learn the details of the government's plan to purchase distressed debt. But considering that much of the financial crisis was caused by easy access to cheap credit, tighter lending standards are only to be expected. - Kimberly Palmer

The Investor

After 18 years of do-it-yourself investing, retiree Alice Meyer is stumped. She faithfully stuck by a fairly aggressive portfolio of U.S. stock mutual funds through the 2000-'02 bear market, but today, she says the game has changed. "I'm not thinking as long term anymore," says Meyer, 65, of Faribault, Minn., who invests through an IRA. "I don't need the money immediately, but I don't know if it's going to be enough to last until I'm 85 or 90." Like many investors—especially retirees or those nearing retirement—Meyer is considering pulling her money out of the stock market and moving into more conservative investments. Some $43 billion flowed out of stock funds in September.

Younger investors have it easy: With decades to go before retirement, they can afford to ride out the turbulence. But older folks want assurance that their nest egg will be intact when it's needed. Just days before the Dow's 778-point drop on September 29, a fifth of people polled by Gallup said they'd seriously considered taking money out of the stock market, and 8 percent already had. "People who are most at risk are those that are five years out and five years in to retirement," says Mark Johannessen, managing director of financial advisory firm Harris SBSB in McLean, Va., and president of the Financial Planning Association. "If you just retired, you're sitting there asking, 'Do I need to go back to work?' and if you're a few years away, you're wondering if you have enough."