Consumer Credit Drops as Mortgage Rates Rise

By: Corey Mutterperl

Borrowing by consumers has fallen for the 3^rd month in a row. In fact, in December the drop was more than two times the expected. There are many reasons for this. One is, that the banks are tightening the standards for loans to consumers because of the risk of default. Another reason for this downturn is that consumers are using less credit. Consumers are worried about losing their jobs and are therefore borrowing less and just trying to pay down any debt they already have. During this recession, consumers are just trying to live within their means and get by on a day-to-day basis and not over extend themselves by taking on more debt. The decline in consumer credit is along all lines of credit. It is in auto loans, student loans and credit card borrowing. Even though consumers are saving more and borrowing less, this does not necessarily help the economy, which is dependent upon consumer spending.

            Over the past week, mortgage rates have risen to the highest levels since Christmas. This makes it more expensive for potential homebuyers to borrow money. This could cause further slow downs in the housing market, which does not help us get out of the recession. One possible idea in the governments stimulus plan is to create a 4% 30 year fixed mortgage for a limited time that will help people buy homes and stimulate the economy.

 References:

 http://money.cnn.com/2009/02/05/real_estate/mortgage_rates/index.htm?postversion=2009020513

 http://money.cnn.com/2009/02/06/news/economy/consumer_credit/index.htm?postversion=2009020616