The housing downturn in the United States - the worst the country has seen in the last 16 years - has made home equity lines of credit more difficult to obtain, forcing consumers back to relying more on their credit cards to finance purchases.
According to a data released by the US Federal Reserve on Monday, consumers have racked up $907.4 billion in revolving credit, which is made up of credit and charge cards, and that looks likely to jump now that the housing slump has blunted another popular financing tool - home equity loans.
The Fed reported that consumer credit rose at an annual rate of 3.7 percent in July, down from a 5.9 percent growth rate for consumer debt in June.
Consumer credit outstanding rose by $7.5 billion to $2.46 trillion in July, up from a revised $2.45 trillion in June, the Fed said.
Credit is the US economy's life blood. During the housing boom, when sales of both new and existing homes set records for five consecutive years (that ended 18 months ago) and prices were rising sharply and mortgage rates were at record lows, many homeowners tapped the rising value of their homes to pay off credit card debt or as a financing alternative to credit cards by taking out home equity lines of credit.
However, Americans have had to cope with 16 rises in interest rates over the past two years and now with home sales plunging and home prices stagnant, lenders are less willing to grant home equity lines of credit.
To add to the worries, people with poor credit histories or low incomes also defaulted on their "sub-prime" mortgages. Those mortgages, often sold to people with bad credit histories and low incomes, have a low introductory rate that increases rapidly during the life of the loan.
The problems later spread to some more creditworthy borrowers and intensified in August, rocking Wall Street. In reaction, the Fed has pumped tens of billions of dollars into the financial system and lowered an interest rate that it charges banks for short term loans. The move came well after 50 lenders had announced they were going out of business.
But, the Fed report has revealed that the housing crisis has not curbed consumers from spending, who are now turning to their credit cards to finance purchases.
Market observers warn this it is a sign that people will risk losing their homes while doing everything to keep their credit cards.
People who are depending more on their credit cards have a problem on their hands, analysts said.
The problem is, credit cards typically come with steeper interest rates and fees, and usually a much lower limit on borrowing. And, if credit terms tighten further and card issuers clamp down, consumers will have little choice but to cut back on spending - a worrisome thought for the U.S. economy as the all-important holiday shopping season approaches.
Moreover, there is an additional risk. The risk is that as debt-laden consumers - particularly those with poor credit who are already struggling to pay mortgages - pile more purchases onto plastic, they will get in over their heads and bad loans will mount too.
This has made banks watch closely for signs of trouble, although so far consumers seem to be holding up.
The most recent performance data for July showed credit card asset-backed securities portfolios are still strong, with historically low rates of loans that banks do not expect to be repaid - known as charge-offs.
However, the US Federal Government is not willing to take any chances. To put things in balance, Randall Kroszner, the Federal Reserve Governor, has taken a sympathetic view of the homeowners, urging companies that collect mortgage payments to "reach out to financially stressed homeowners."
"Keeping families in their homes is a matter of great importance to the Fed," he said recently, urging the lenders to go slow on foreclosure.
The policy maker's view reflect that of the US President George W. Bush who earlier had expressed confidence that the country would safely weather the financial storm.
In a recent statement, Bush had assured assistance to the homeowners struggling to make their mortgage payments. He, however, had issued a warning that he has no interest in bailing out lenders who took on too much risk and ended up with bad loans.