By AnnaMaria Andriotis
Europe’s debt problems could soon spill over into the pockets of U.S. consumers. Beyond trying to shore up Europe’s debt woes, the central banks’ action today is also aimed at ensuring availability of credit to U.S. households. But experts warn that help may fall short.
In its statement today, the Federal Reserve said the latest step – in which major central banks made it easier for banks to get dollars if they need them — is intended to lessen the “strains on the supply of credit to households.” But consumers shouldn’t get excited, experts say. There’s no sign that getting credit cards, car loans or mortgages will become any easier. At best, these steps are designed to prevent credit from getting any tighter, and effectively maintaining the status quo, says Greg McBride, senior financial analyst at Bankrate.com. “What they’re trying to do is stay ahead of and prevent a global credit crunch,” he says.
For consumers, the possible outcomes vary greatly. The best-case reality for the next few years is that credit standards will remain the same. That means consumers will have to continue to meet the tight standards set by lenders including high FICO scores and low debt levels, says Odysseas Papadimitriou, chief executive at CardHub.com, a credit card comparison web site.
Then there’s the worst-case scenario if a European Union country does default. Mike Moebs, economist at Moebs Service, an economic research firm, describes a bleak chain of events: “If Europe goes down, we go down — meaning credit will completely lock up.” But what’s more likely, he says, is that credit will become more expensive and harder to get. On car loans – which have fewer consumer protections than credit cards — lenders could require higher credit scores than they ask for now, they might ask for cosigners, or even add extra fees, he says. He adds that fees on mortgages could rise as well.
But some experts say a return to a full blown credit crunch is highly unlikely. Cameron Findlay, chief economist at LendingTree.com, points out that banks have more liquidity now than they did post-Lehman Brothers. On the mortgage front, Findlay points out that the ongoing European debt woes could continue to help mortgage borrowers by keeping rates low.
The bottom line for consumers is that access to affordable credit, with low rates and fees, will remain available to those with the best credit, experts say — barring any major economic surprise. “It’s a very fluid situation and one that could change for the worse very quickly under unfavorable scenarios,” says McBride.