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Consumers Cope With Tightening Credit

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The Associated Press

Published: September 27, 2008

When Deb Freitag applied for a credit card so she could replace her roof, her leaky refrigerator and her old dishwasher, she was offered a $1,000 line of credit, not the $5,000 she needed.

When Mark Ryan finally scraped together more than enough to buy a home, he found that the mortgage a bank promised him earlier this year was no longer available.

In a land where TV blares no-money-down pitches and everything from homes to furniture to college education is bought with borrowed money, the crisis on Wall Street is causing the credit market to seize up. On Main Street, this means fewer loans and smaller loans at higher rates.

No one is sure how bad it will get, especially with the fate of the proposed $700 billion government bailout unknown. But people's inability to borrow has potentially dire effects, since consumer spending accounts for two-thirds of U.S. economic activity.

"If not fixed fairly soon, we may find that individuals and smaller businesses have much higher costs for borrowing - or in the worst case are unable to borrow at all," said David Stowell, finance professor at Northwestern University's Kellogg School of Management.

Freitag, a 43-year-old freelance writer in Cincinnati, was surprised when she tried to get a credit card from home improvement chain Lowe's this month. She got the $1,000 credit line bumped up to $2,000 after she complained, but even that wasn't enough.

Freitag calculated that her purchases would add up to almost $9,000, including $6,000 for her roof, which was damaged in a wind storm this month.

Now she will have to take out a consumer loan, which has bad consequences: Merely searching for the loan could hurt her credit rating, and she will have to start paying it back right away.

"These are needs," said Freitag, whose husband recently lost his job in corporate video production. "I am not going out and buying a designer kitchen."

Ryan, 37, a social worker in New York City, can finally afford a home in one of the most expensive housing markets. But he can't get a mortgage.

Swiftly preapproved by his bank for a loan in February, he went back this month after finding the apartment he wanted. But he was told he had to fill out a 17-page application to get reapproved - even though he had since added $50,000 to his bank account. While he waited for approval that ultimately never came, the apartment was sold out from under him.

"As a first-time homebuyer, in a way conditions couldn't get any better," he said. "If you can get your mortgage, rates are going down to the point where average people can afford them. But with the banks so paranoid, it's just tough getting one."

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