Credit Crunch Moves Beyond Mortgages

Individuals See Higher Rates,
Harsher Terms on Credit Cards
And Other Consumer Loans

August 22, 2007

It’s not just mortgages. As it gets tougher to land a home loan, some people are also finding it harder and more expensive to get other types of consumer credit.

Some lenders, such as USAA, are nudging up credit-score requirements across their auto loans, credit cards and personal loans. Bank of America Corp. and Capital One Financial Corp. recently raised fees and interest rates for some of their credit-card customers. And this month, Citigroup Inc.’s CitiFinancial Auto started charging higher auto-loan rates for borrowers with less-than-perfect credit.


• Some lenders are raising fees and tightening credit on credit cards and auto loans.
• Lenders are likely to make it harder for borrowers with weaker credit in markets hit by a housing downturn.
• Watch your credit card mailings for any changes in terms and conditions. You may be able to opt out of the new terms.

All this comes as lenders continue to tighten guidelines on mortgages and home-equity loans and lines of credit as investors back away from subprime loans and other perceived credit risks. For the most part, lenders say the changes aren’t directly tied to the mortgage mess, but reflect concerns about an economic slowdown and uncertainty about interest rates. Still, some lenders are becoming more cautious about extending credit in weaker housing markets and to people who may have exposure to certain riskier mortgages.

"In the past few months, we’ve been tightening up our credit underwriting standards and raising our score cutoffs slightly," says Barbara Johnson, vice president of USAA Federal Savings Bank, referring to the bank’s credit cards, auto loans and personal loans. The bank has also scaled back credit-line increases in its credit-card business. "We used to offer frequent, automated line increases, and now, we’ve pulled back on that a little bit," she says.

A spokesman for J.P. Morgan Chase & Co.’s Chase says the company has been tightening up credit guidelines across some consumer products, such as home-equity and auto loans, mainly among customers with weak credit who live in markets that have been hurt by a decline in home prices.

Lenders aren’t tightening credit standards nationwide. That’s why the average interest rates on many types of consumer loans haven’t changed much since the beginning of the year. Rates on variable-rate credit cards, five-year new car loans and personal loans are averaging 13.9%, 7.8% and 14.5%, respectively, roughly the same as they were in January, according to

Card issuers can afford to be more selective about whom they extend credit to and by how much because more consumers — increasingly locked out of home-equity loans and lines of credit — are using their credit cards more. This month, for example, the Federal Reserve said consumer credit rose at an annual rate of 6.5% in June to a record $2.459 trillion, the second straight sizable gain. The increase was led by an 8.4% rate of increase for revolving credit, the category that includes credit-card debt.

Doug Eddings, a 35-year-old small-business owner in Portland, Ore., says three of his credit-card issuers all took steps in recent weeks to tighten his credit, either by raising his interest rate, halving his available credit or freezing his accounts. First, he received a notice from Chase in June, notifying him that it was going to raise the interest rate on his Chase Amazon card to 29% from 17%. Soon after, another lender, HSBC Holdings PLC’s HSBC North America, dropped his $5,000 credit line on his Best Buy store card to $2,105 — just $5 above his current balance.

"When I called them up, they didn’t have an answer for me but said it was something in my credit file," says Mr. Eddings, who had recently used the card to buy a refrigerator for his new home.

He also got hit with a "financial review" this month from American Express Co., which froze his accounts until he could send in additional tax forms from the IRS for them to look at. Although Mr. Eddings, who has a high credit score, says he hasn’t been late on any payments, he recently requested a credit-line increase on his Delta SkyMiles card, which American Express raised to $15,000 from $5,000.

In addition, he took out an interest-only mortgage this past spring through a local broker to buy a new home. His mortgage was originally offered through American Home Mortgage Investment Corp., which filed for bankruptcy-court protection earlier this month, and was then sold to Countrywide Financial Corp. "I don’t know if it has anything to do with the mortgage industry, but it does seem coincidental," Mr. Eddings says.

Economists are increasingly worried that the credit crunch in the mortgage market could spread further into other types of consumer loans. The Federal Reserve’s quarterly survey of senior loan officers, released last week, showed a small increase in the number of banks that have tightened credit standards for consumer loans (excluding credit cards) over the past three months.

This week’s drop in short-term Treasury bill yields is yet another symptom of the turmoil that’s roiling the credit markets, since it signals that investors are fleeing to the safest assets available. "If this turns out to be a blip on the radar — one to two weeks, even a month — then it will probably only have a modest impact" on lenders’ credit standards, says Stephen Stanley, chief economist at RBS Greenwich Capital in Greenwich, Conn. "But if we see these sorts of conditions continue for months and months, then it probably will start to have an impact on the way that lenders see risk in the consumer-credit arena."

Industry consultants say there are signs that card issuers are already becoming more cautious. Average credit-card approval rates across the industry have dropped by five percentage points to 35% over the past year, while credit lines for subprime borrowers have fallen to an average of $1,000 from $1,250 a year ago, according to Robert Hammer, chief executive of R.K. Hammer, a bank-card advisory firm.

Issuers have also cut back on direct-mail offers to new customers. In the second quarter, such offers were down 6% from the first quarter, continuing a decline that began at the end of last year, according to Mintel International Group Ltd.’s Mintel Comperemedia unit, a direct-mail market-research firm. Meanwhile, credit-card and consumer news Web sites such as, and say they are getting more complaints from consumers who have seen their credit lines fall or interest rates jump.

Nationally, credit-card delinquencies are relatively low at 4% and haven’t risen significantly in the past three years. However, in certain markets, especially those that have been hit hard by a decline in home values, delinquencies have spiked higher. In Fort Myers, Fla.; Port St. Lucie, Fla.; and Stockton, Calif., for example, delinquencies have jumped about two percentage points in the past year to as high as 5%, according to an analysis by Equifax Inc. and Moody’s

"If [lenders] see a household start to go late on payments, they’re going to be much quicker to respond," says Mark Zandi, chief economist at "They may reduce the size of the credit line or may raise the interest rate. They’re responding much more quickly to any signs of stress."

Patti Powell, a 49-year-old child-care provider, got a notice from Barclays PLC’s Juniper Bank last month telling her that her account, which she had for several years, was being closed. The Lovington, N.M., resident says she wasn’t late on any payments and mailed in more than the minimum payments each month. But in recent months, she started to use the card more, and her total balance had climbed to about 80% of her available $3,000 credit line, from about 22% previously. In a separate move last year, American Express dropped the credit lines on two of her cards, she adds.

For their part, lenders say they are monitoring the credit environment carefully. A Citigroup spokesman says the bank is "constantly adjusting our underwriting standards to best reflect market conditions, updates to our risk models and a variety of other factors," while a Bank of America spokeswoman says it hasn’t seen "significant issues or had to significantly change our underwriting standards" in the current environment. Chase, meanwhile, is "thinking hard about the loan qualifications for people," says spokesman Tom Kelly, who adds that "most consumers can still get credit at a fair rate."

For consumers, it’s a good idea to look out for any change in terms and conditions from the issuers. Although issuers can change rates and fees at any time, many will allow customers to opt out of those changes and pay off any balances under existing terms — although they will typically have to close their accounts. In recent months, Capital One, for example, changed many of its fixed interest rates to higher variable rates, while Bank of America implemented a new monthly minimum finance charge of $1.50 on former MBNA credit-card customers this past spring to bring charges in line with its existing customers’ fees.

Meanwhile, Discover Financial Services recently raised the higher end of its interest-rate range to 18.99% from 17.99% and began charging higher minimum payments for certain customers who used over 90% of the available credit on balance-transfer offers.

Another victim of the trend toward tightening credit: once-generous introductory credit-card offers. "We’ve seen the length of the introductory periods diminish on certain offers and more lenders offering introductory rates ranging from 2.9% and 6.9% instead of 0% financing offers," says Curtis Arnold, founder of

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