How the Credit Crisis on Wall Street Is Affecting Main Street

Sept. 25, 2008 — -- We've all heard Treasury Secretary Henry Paulson and Federal Reserve Board chair Ben Bernanke warn that the big Wall Street bailout is necessary because credit is dangerously tight and our economy could come to a standstill.

But we wanted to know -- are the effects starting to trickle down to real people?

So we checked into the types of loans consumers need most and learned you'll need a higher credit score and more time to get less money.

Credit Cards

The nation's credit crisis arrived at Pamela Pfitzer's house outside Sacramento, Calif., via the U.S. mail. She received notices from two credit card companies reducing her spending limits -- one dramatically, from $2,800 down to $1,000.

"I was pretty angry," Pfitzer said. She says her financial situation didn't change. The banks' did. "It doesn't seem logical to me. I could see if I made late payments or no payments, but nothing changed at all."

She's not alone. American Express reduced the limits of more than twice as many card holders as usual this year.

Those numbers are no surprise to Gail Cunningham of the nonprofit National Foundation for Credit Counseling, which is affiliated with the popular Consumer Credit Counseling Service.

"Creditors are circling the wagons," she said. "They can't afford people who can't pay back the loan."

The number of unsolicited credit card offers people receive in the mail has declined, according to Synovate Research. However, if you have stellar credit, your mailbox will still be full.

But stores are still offering instant credit because they need the boost to sell merchandise. Plus they know that a huge percentage of people fail to pay off the "0 down 0 payments for 12 months" type loans in time.

Fail to pay and you owe a hefty interest rate that is retroactive to the date of your purchase. Ouch!

Home Equity Lines, Mortgages

Lenders are lowering limits on existing home equity lines, too, and even offering hundred-dollar bonuses to people who agree to close their lines, all so they don't have to worry about these potential liabilities.

And if you want to open a brand new home equity line you will find it harder to do.

As for mortgages, it's no longer possible to get a mortgage without putting money down and lenders prefer a solid 20 percent down payment. Otherwise you will probably end up paying for private mortgage insurance.

During the bubble years, some banks offered "fast track" mortgage approvals where they didn't even verify your income. They took your word for it. Not now.

Banks are putting a much bigger emphasis on solid property appraisals. No more casual "drive-by" appraisals. They want to make sure they are not lending you more than the home is worth.

They are even leery of lending you the same amount the home is worth if it is located in what they consider a "declining market."

During the boom you were guaranteed to get a great loan if you had a FICO score of 680 or higher. Lenders say now you need at least 720.

In the old days, a score of 580 or less was considered subprime. Now you are subprime if you score below 620. Because 20 percent of Americans fall below 620, a lot of people won't be able to get an affordable mortgage at all.

Student Loans

Student loans are the one bright spot. We learned this is the one type of loan virtually unaffected by the economic crisis.

Why? Because the government wants to promote education, even for students with imperfect credit.

Auto Loans

We also looked into how hard it is to get an auto loan right now and found it is harder to get these days.

"They're required to put more money down than prior," said Ethan Rossignol of Darcars Toyota in Silver Spring, Md. "They must provide more documentation such as proof of income, proof of residence, those types of things."

It pays to shop around, because while banks are tightening their lending standards, some car dealers are loosening theirs -- because they need to sell cars.

Zero percent car financing used to be available to about half of customers, according to the National Automobile Dealers Association. There probably won't be as many of these offers in the coming months and only people with tip-top credit qualify for them, so not as many of us will get to take advantage of them.

Some auto lenders are reducing the number of years to pay back a loan. That makes your monthly payments a bit higher, but is ultimately a good thing, because many consumers found they were paying for so long that they owed more than the cars were worth.

Economists believe the used-car market will expand and the new-car market will contract. So if you like to buy used, you're going to have more competition.

Advice for Consumers

In the past, if you had imperfect credit you got a less favorable loan. Now, you won't get a loan at all. So, if you're going to need a big loan for a house or a car, start working on your credit a couple months in advance. Keep in mind, your credit score is constantly changing and improves with every bill you pay on time.

Ask your lender about a process called rapid rescoring, in which experts help you correct mistakes in your credit file that are dragging your score down. You can often take legitimate steps that will boost your score just enough to get into the next plateau of borrowers.

One note: Say no to questionable companies that offer to add you to a stranger's credit card as an authorized card holder. The idea is to improve your score by riding the coattails of somebody with good credit.

Legitimate mortgage bankers have another word for it: fraud.