PRINCETON, NJ -- Anecdotal evidence suggests that the nation’s bankers are in the process of closing the proverbial barn door after the horses have gotten out in the consumer lending markets. Loan losses have regulators and lenders returning to more normal underwriting standards, making it much more difficult for consumer borrowers to financially leverage themselves the way they have over the past several years.
Still, the October Experian/Gallup Personal Credit Index poll suggests that while the consumer credit crunch that has been underway for several months continues, it has not intensified -- at least in terms of current consumer perceptions. Although some optimists may hope this new information means the consumer credit crunch will not intensify, the reality may be that this new poll is simply reflecting a lag in consumer recognition.
Little Change in Percentage Who Know Someone Turned Down for Credit
During October, about one in six consumers (17%) say they know someone close to them who has been turned down for credit they applied for during the past three months. This is the same as in September and not much different from what consumers have been saying over the past six months.
Few Consumers Know Someone Who Filed for Bankruptcy or Had a Foreclosure
In October, 13% of consumers say they know someone who has filed for bankruptcy or who has experienced a foreclosure during the past three months. This is essentially the same as the 12% in September.
Recognition of Credit Crunch Is Lagging
When consumer credit is squeezed by higher interest rates, consumers and businesses quickly recognize it. However, the current consumer credit crunch is the result of lenders returning to the more normal underwriting standards of the past. When major financial companies are reporting enormous portfolio write-downs and taking the associated losses, no lender wants to be seen by its investors or its regulators as adding to its credit risk exposure.
The process of revising consumer lending underwriting standards, however, takes time to work its way through the banking system. It also takes time for consumers to recognize what is happening and for word of these tighter standards to spread. This lag in implementation and recognition suggests that the impact of the consumer credit crunch has yet to be fully felt or appreciated.
The lag in responsiveness, not just in terms of the traditional economic data but also the attitudinal economic measures, will make things difficult for the Federal Open Market Committee when it meets next week to consider its interest policies. Trying to accurately gauge the impact of the consumer credit crunch is challenging to say the least. Even more difficult for policymakers, however, may be deciding the degree to which lower interest rates can mitigate the effects of the current consumer credit crunch on the U.S. economy.
Survey Methods
Results for October are based on telephone interviews with 1,003 adults, aged 18 and older, conducted Oct. 1-8, 2007. For results based on the total sample of respondents, one can say with 95% confidence that the maximum margin of sampling error is ±3 percentage points. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.
