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Credit tightening may change lives of millions

An inflatable gorilla beckoned from the roof of Don Brown Chevrolet in St. Louis. Servers doled out free bowls of pasta, and a salesman urged potential customers to "come on up under the canopy and put your hands on" a new set of wheels.

But sitting across from a salesman in a quiet back room, Adrian Clark could see it would not be nearly that easy. This was the ninth or 10th dealership for Clark, a steamfitter looking for a car to commute to a new job. Every one offered a variation on the discouragement he was getting here: Without $1,000 for a down payment, no loan.

"It's just rough times right now," Clark said. "Rough times."

For him, and for a nation of consumers heavily dependent on credit, there are growing signs that those rough times could be the beginning of a stark, new reality.

Is America's long era of easy credit over?

Experts say that even when the current credit crunch eases, the nation may finally have maxed out its reliance on borrowed cash. Today's crisis is a warning sign, they say, that consumers could be facing long-term adjustments in the way they finance their everyday lives.

"I think we're undergoing a fundamental shift from living on borrowed money to one where living within your means, saving and investing for the future, comes back into vogue," said Greg McBride, senior analyst at Bankrate.com. "This entire credit crunch is a wake-up call to anybody who was attempting to borrow their way to prosperity."

A prolonged period of tighter credit is ahead, experts say.

U.S. consumers will find it much harder to get a credit card, and to carry large balances. Late fees will rise and lines of credit will be reined in. After years of buying homes with interest-only loans, or loans that allowed people to borrow more than the value of the home, substantial payments and down payments will be required. Interest rates are also likely to rise.

Lenders, far more wary of risk, have tightened the standards they use to judge potential borrowers. Regulators will be looking over their shoulders.

Depending on debt

Americans are more reliant on debt then ever before.

The portion of disposable income that U.S. families devote to debt hit an all-time high in the second half of last year, topping 14 percent, figures from the Federal Reserve show. When other fixed obligations — such as car lease payments and homeowner's insurance — are added in, about one of every five household dollars is now claimed by bills.

The credit card industry lobbied heavily in 2005 to tighten bankruptcy laws to make it more difficult for consumers to seek court protection and shed responsibility for paying off debt. But in a sign of just how much households have become dependent on borrowing, the average amount of credit card debt discharged in Chapter 7 bankruptcy filings has tripled — to $61,000 per person — from what it was before the law was passed.

"We are going to have to cut back," said Dean Baker of the Center for Economic and Policy Research, a Washington, D.C. think tank. "We've really been living beyond our means."

Americans, borrowing to cover ordinary living expenses, have all but abandoned saving.

The U.S. personal saving rate dropped to well below 1 percent in late 2007 and early this year, according to figures from the federal Bureau of Economic Analysis. The figure has edged up in the last few months, but the actual savings rate might still be near zero, given that many people are covering living costs by using credit cards or money saved earlier, according to the BEA.

The lack of savings is in sharp contrast with the decades after World War II. Americans routinely saved more than 10 percent of their income in the early 1970s.

Now, many families spend virtually all of their incomes covering living expenses, and even that is not enough.

"In the credit era, which is like living on steroids, you're not saving money, you're not breaking even. You're actually borrowing 20 to 30 percent," said Robert Manning, author of Credit Card Nation: The Consequences of America's Addiction to Credit.

Consumer borrowing falls

The new era of tighter credit will largely be a mandate, as consumers are forced to adjust to tougher rules and tighter limits. But consumers have also begun showing signs of a change in mind-set, putting off purchases, buying less expensive substitutes, going out to eat less, and rethinking their propensity to do so on credit.

Consumer borrowing fell in August for the first time in more than a decade, the Federal Reserve reported last week. The decline, at an annual rate of 3.7 percent, reflected a sharp drop in the category of borrowing including auto loans, and a smaller decline in the category including credit cards.

The tightening of credit will force American families to be mindful of their current paychecks instead of borrowing against future ones, said Frank Badillo, senior economist with TNS Retail Forward, a consulting and market research firm in Columbus, Ohio.

"We're going to see some fundamental changes in consumer behavior," he said.

Badillo and others compare the psychology to the way people reacted after gasoline reached $4 a gallon last summer. Prices have eased since then, but consumers seem to have decided that the good old days of cheap gasoline are over. They're buying smaller, more efficient cars, and trying to reduce the miles they drive.

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