Banks and Credit Companies Tighten Lending Standards

As the financial crisis keeps raging, banks and credit companies are incurring more losses and desperately trying to get back on track. The governmental financial rescue programs do not seem to bring the banking sector any significant relief so far. And banks try to handle problems on their own.

No secret and no credit card news to anyone that in the attempts to make it up for the losses, banks raise interest rates on loans, cut credit lines, charge higher fees and tighten lending standards. Business loans, mortgages and credit cards became harder to qualify for. The latest quarterly survey conducted by the Federal Reserve shows that banks have tightened standards even more over the past three months.

Within the scope of the survey 55 domestic banks and 21 US offices of foreign banks were questioned. A sizable percentage of banks reported to have tightened terms and their lending standards on all major loan categories.

85% of the domestic banks questioned said they changed the terms and standards for "commercial and industrial" loan - the major type of business loan. And, as you guess, the changes were not towards loosening rules and regulations. As compared to the Fed's previous study in June, the percentage figure has gone up by 25%. At the beginning of summer the amount of banks that toughened terms and conditions for "commercial and industrial" business loan made up 60%.

95%, an overwhelming majority of banks reported tighter qualifying standards for large and medium-size businesses that ask for credit line extension. As for small businesses, banks treated them more favorably. And small business credit cards are still a good option for business owners.

Many banks tightened standards and enforced new credit card rules not just for plastics, but other types of consumer loans as well. About 65% of banks reported that they had tightened lending standards for other type of loans for borrowers. Almost 60% said they imposed stricter rules and conditions on credit card debt.

Bad credit cards owners, in other words consumers with less than perfect credit, were the first one to feel the credit crisis' strike. But the crisis does not have mercy even for consumers with spotless credit histories. Neither do banks. Around 20% of the domestic banks are cutting credit limits, raising interest rates or even close excellent credit card deals.

The housing market downturn in general, and the subprime mortgage crisis in particular, made most lenders dramatically rise mortgage rates and toughen terms for subprime and nontraditional borrowers with weak credit histories. But prime borrowers also had to face tighter lending standards concerning mortgage loans.

You see, and probably feel that qualifying process for new credit cards and other types of loans got much more complicated. You can find credit card that meets your requirements, but will you meet the lending standards of the credit card issuer you choose? Will your credit history pass the test?

But still the government keeps working on new programs and rescue plans for the banking sector and credit card industry. The latest attempt to help banks was a $250 billion injection-to-be. The government planned to directly by shares in banks, generating the $250 billion bailout this way. Another government plan is to buy from banks billions in distressed assets associated with mortgage.