News sources like to use the term “credit crunch” in describing the U.S. economy, but they rarely define what a credit crunch is and what it means for Americans.
A credit crunch is when the amount of available loans suddenly decreases over a very short period of time.
Usually, it follows a period of lending which, in hindsight, becomes known for its “easy money”.
The start of a credit crunch often coincides with consumer loans starting to go bad and lenders losses starting to mount.
The realization that more losses are ahead forces lending institutions to tightening their respective lending guidelines.
Since the current credit crunch began in mid-2007, Americans looking for credit now face:
- Higher credit score requirements on auto loan applications
- Higher fees and interest rates on credit cards
- Larger downpayment requirements on their home purchases
And now, the newest symptom of the credit crunch: the largest buyer of mortgage loans — Fannie Mae — has instituted a new, 580 minimum score requirement for all mortgage applicants.
As consumer delinquencies mount and the economy continues to sputter, getting access to credit will likely get tougher for every American — good credit and bad.
And that’s the defining characteristic of a credit crunch.
Wikipedia, April 8, 2008