Some people can’t get home loans or refinance their adjustable-rate mortgages. Others are seeing the interest rates on their credit cards double. It’s the biggest consumer credit crunch in recent memory, and few experts expect it to go away soon.
You can’t tell it by my mailbox.
In the past six weeks or so, I have received nine credit card offers, most promising me zero interest for 12 months. I’ve torn up numerous sets of “convenience checks” sent by credit card companies that wish I would spend more. I’ve been preapproved for home-equity loans from Citibank and Capital One, and I have received three personal loan offers, including an actual $9,000 check from HFC.
Add it all up, and I could have more than $200,000 in new credit. Stop me before I say yes!
The barrage is as unrelenting as it is mystifying. My husband and I took out a jumbo mortgage in March to pay off a construction loan on a home we rehabbed in Chicago. For extra wiggle room, I accepted two credit card offers last fall. I still have almost $30,000 in balances on those two cards although I’m not paying interest yet, and the money to pay the cards off is stashed in a credit union.
I’m far from the only one stretching.
Consumer debt grew in July by $7.5 billion, a 3.7 percent annual rate, according to data released last week by the Federal Reserve. Credit card debt rose even faster, at a 6.6 percent annual rate, the third consecutive monthly increase after June’s 6.4 percent rise and May’s increase of 10.9 percent.
Doesn’t sound like much of a credit crunch.
What’s happening is the polarization of credit availability, explains Carl Steidtmann, chief economist with Deloitte Research. Those with marginal credit scores are seeing their offers dry up while those with higher numbers are being inundated with solicitations.
“We can talk about the ‘haves’ and ‘have nots,'” Steidtmann said.
Among the haves are people like me, homeowners who are keeping up with their mortgage payments. It’s a large group even though mortgage delinquency rates topped 5 percent in the second quarter and undoubtedly will go higher.
Although they have been getting lots of attention, subprime loans, the sector with the highest default rates, represent only 14 percent of all first mortgages.
There’s no real mystery why new home owners are attractive quarry.
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“When you get in the house, you’re going to find a lot of other things you want to do. You’re going to say, ‘We might as well go the whole nine yards.’ You are psychologically positioned to take on additional debt to finish the job you started,” said David Robertson, publisher of the Nilson Report, a credit card newsletter in California.
“The lenders, the credit card companies, are feasting at the trough,” Robertson said.
There’s another division in the credit market, adds Barrett Burns, chief executive of VantageScore Solutions, a credit scoring company owned by Experian, Equifax and TransUnion.
There’s a credit crunch in mortgages because investors who were buying into pools of home loans ran for the sidelines in August. That created a liquidity crunch that forced some lenders to stop lending or dramatically tighten their standards.
However, investors are still eager to buy into pools of credit card debt, which means card issuers still have plenty of money for tempting consumers.
For now, however, “They’re still trying to beat each other’s brains out to acquire accounts.”
Discover Financial Services, the issuer of the Discover Card, is one of those firms that isn’t throttling down. The company, based in north suburban Riverwoods, says it hasn’t cut back on the number of new-customer solicitations it sends out despite the challenges facing the subprime mortgage borrowers.
Discover isn’t worried about being whacked by a wave of defaults because it targets consumers with “good to excellent” credit scores. “We don’t delve into the subprime area,” spokesman Matt Towson said.
No one likes to be reduced to a number, but right now your credit score is critical, lenders say.
Ken Perlmutter of Chicago area mortgage broker Perl Mortgage, says it has become “more challenging” to find loans for anyone with a score below 620. “I took a customer with a 612 score, and I have my assistant looking around. I don’t know what we are going to find,” Perlmutter said. “You want to be at 680 or higher.”
Although he has stayed away from the subprime market, Perlmutter says home loans were being made to borrowers with credit scores in the 500s not that long ago.
Consumers usually won’t find their credit score on a credit report, because it’s a number generated when a potential credit granter pays for it. But credit scores are available at a variety of places, including MyFICO.com, which offers a one-month free trial of its credit watch services.
I decided to check my credit score to see what was making me so attractive. After a few minutes of typing in some basic information, I had my FICO report.
No surprise to me, my total amount of outstanding debt was rated as “not good.” The report shows I have tapped into more than 51 percent of my available credit lines. For “FICO high achievers,” the average ratio is 7 percent, according to MyFICO .com.
That was balanced by several pluses. The length of my payment history is 23 years, which the report tells me is “great.” My history of paying bills on time is also top-notch.
Overall, my FICO score is 745, which puts me in the “very good” category and indicates I am “a very dependable borrower,” the report says.
Still, if I already have plenty of debt, what’s with all the offers I’ve been getting?
Discover, one of the companies that has been sending me offers, says my FICO score is “considered prime by most lenders,” making me a “low-risk prospect.”
My debt-to-credit ratio would come into play to determine the size credit line they would offer me. Because I already have balances on other cards, Discover would offer me less rope than it would otherwise, Towson said.
Other credit issuers are making the same kind of calculations, said the Nilson Report’s Robertson. But if I — or other consumers — am late with one mortgage payment or credit card bill, the offers will dry up immediately, he says, because other credit grantors are scanning the credit reports on prospects regularly.
For now, my long track record of paying on time is more important than the recent balances I’ve run up, Robertson says.
“They trust you. You’re not a person taking a vacation; you’re fixing up your house. They’re going to take that risk because it’s a really good risk,” he said.
“In the worst of times, 93 percent of people pay back all their bills. Think about it. The likelihood is overwhelming you will pay them back.”
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