--- title: A ‘Credit Crunch’ Is Looming. Here’s How It Could Affect Your Wallet description: A massive "credit crunch" is making it harder for businesses and consumers to get loans — including mortgages and credit cards. authors: - name: Adam Hardy role: Lead Data Reporter url: https://money.com/author/adam-hardy/ bio: Adam Hardy is a lead data journalist at Money, where he frequently reports on financial barriers that affect low-income Americans. Adam’s work has also appeared in Business Insider, Forbes, Nasdaq, The Penny Hoarder, Yahoo! Finance and more than a dozen local and regional newspapers. education: University of South Florida, BA, Magazine Journalism at_money_since: 2021 articles: 501 covers: - Banking - Business - Career Advice - Credit - Credit Cards - Debt - Economy and Politics - Education - Health and Wellness - Housing - Identity Theft - Insurance - Investing - Lifestyle - Loans - Mortgages - Personal Finance - Pets - Professional Services - Retirement - Shopping - Taxes - Technology also_seen_in: - The Penny Hoarder - Forbes Advisor - Creative Loafing - The New York Times - The Washington Post - Bloomberg - Harvard Law School - The Federal Register - National Consumer Law Center - CBS News - Becker's Hospital Review - Business Insider - Mother Jones - The Week - Fortune - The Philadelphia Inquirer - National Association of Student Financial Aid Administrators (NAFSAA) - Education Advisory Board (EAB) - The Institute for College Access & Success (TICAS) - This Morning with Gordon Deal - Empower - Reddit social: - https://www.x.com/hardyjournalism - https://www.linkedin.com/in/hardyjournalism/ editors: - name: Brad Tuttle role: Senior Editor url: https://money.com/author/brad-tuttle/ bio: Brad Tuttle is a former senior editor at Money with over 10 years’ experience covering a vast number of personal finance topics, including careers, cars, travel, budgeting, investing, insurance, credit cards, consumer psychology, real estate, banking, and shopping and deals. education: Columbia University School of Journalism, MS at_money_since: 2014 articles: 366 covers: - Banking - Business - Career Advice - Credit - Credit Cards - Economy and Politics - Education - Health and Wellness - Housing - Identity Theft - Insurance - Investing - Lifestyle - Loans - Mortgages - Personal Finance - Pets - Professional Services - Retirement - Shopping - Taxes - Technology social: - https://twitter.com/bradrtuttle - https://linkedin.com/in/brad-tuttle-834b225 former_staff: true published: '2023-04-17T15:22:04.000Z' modified: '2024-01-10T14:43:26.000Z' section: Banking word_count: 1005 canonical: https://money.com/credit-crunch-affects-loans-interest-rates/ type: Article source: structured-blocks --- > **Disclosure:** We research all brands listed and may earn a fee from our partners. Research and financial considerations may influence how brands are displayed. Not all brands are included. [Learn more](https://money.com/page/disclaimer/). ![US dollar being sandwiched in an old vice](https://img.money.com/2023/04/News-Credit-Crunch.jpg) It’s getting a lot harder to [take out a loan](https://money.com/get-a-personal-loan/) these days. That goes for both [businesses](https://money.com/best-small-business-loans/) and [consumers](https://money.com/best-personal-loans/). Now, some experts are worried that a full-fledged “credit crunch” could have serious repercussions on the economy as a whole. On one hand, making it harder to borrow money is the whole reason the Federal Reserve has been [hiking interest rates](https://money.com/fed-interest-rate-hike-march-2023/) since March 2022. Inflation was out of control — [peaking at 9.1% in June 2022](https://money.com/inflation-june-2022-cheaper-prices/) — and the Fed sought to rein in soaring prices by making it more expensive to borrow money through a series of fairly predictable interest rate hikes. Then, something largely unexpected happened: the [failures of Silicon Valley Bank](https://money.com/svb-collapse-what-it-means/) (SVB) and [Signature Bank](https://money.com/bank-failures-explained-questions-answers/). The SVB failure was the second largest banking collapse in U.S. history. In the aftermath, experts are worried that banks could be tightening their lending standards faster than expected, possibly leading to a so-called “credit crunch.” “Buckle up,” Paige Skiba, an economics professor at [Vanderbilt University](https://money.com/best-colleges/profile/vanderbilt-university/) who specializes in high-interest credit, tells Money in an email. “It’s already here.” In the [words of the Fed's own economists](https://www.federalreserve.gov/econres/feds/the-credit-crunch-and-fall-in-employment-during-the-great-recession.htm), a credit crunch is “a dramatic worsening of firm and consumer access to bank credit.” In slightly different terms: If there's a credit crunch, businesses and consumers won’t be able to get loans when they need them, and that can slow the economy down or even lead to [a recession](https://money.com/are-we-in-a-recession/). Recent data shows that banks have indeed been tightening their lending standards. Starting back in the third quarter of 2022, it was getting [tougher for consumers to get access to credit](https://money.com/harder-get-approved-credit-card-tips/), according to the Fed’s quarterly survey of senior loan officers. That trend [continued in the fourth quarter](https://www.federalreserve.gov/data/sloos/sloos-202301.htm) as well. At the end of 2022, the tighter lending standards were largely due to the [Fed’s rate hikes](https://money.com/fed-interest-rate-hike-march-2023/). As Randall Watsek, a financial advisor at Raymond James, explains it, people were already taking their [savings out of banks](https://money.com/best-savings-accounts/) — because it was earning hardly any interest — and investing it in [money market funds](https://money.com/best-money-market-accounts/) and treasury bills that offered returns of 5% or more. These rates have been difficult for banks to compete with. And with lower cash on hand due to falling deposits, banks have been getting pickier with lending out money. So if these issues are ongoing, why all the commotion about a credit crunch now? The rippling effects of the [recent banking meltdowns](https://money.com/bank-failures-explained-questions-answers/) have accelerated the trend, though the exact impact is still an open question. “We have seen a huge flow of deposits out of the banking system in the last several weeks to money market funds and other types of investment\[s\],” Rohit Chopra, director of the Consumer Financial Protection Bureau, said during a Washington Post Live [event](https://www.washingtonpost.com/washington-post-live/2023/04/11/cfpb-director-rohit-chopra-consumer-protection-banking-industry/) Tuesday. The Fed's next quarterly survey of loan officers, to be released in May, should give clearer insight into how banks lenders are reacting to the failures of SVB, Signature and other firms. Data that's already available suggests the picture won’t be pretty. According to a [separate Fed report](https://www.federalreserve.gov/releases/h8/current/h8.pdf) that tracks the balance sheet of commercial banks in the U.S., bank lending declined by about $105 billion in the final two weeks of March — the fastest decrease on record dating back to 1973. Torsten Slok, chief economist at the financial firm Apollo, views this as a clear sign of a credit crunch. In a [recent note](https://apolloacademy.com/how-are-banks-responding-cutting-lending-and-selling-mortgages/), he wrote that the immediate panic following the recent bank failures seems to have calmed, but the behavioral pullback in lending by banks is starting to weigh on the economy. “In short, the credit crunch has started,” he added. ## How a credit crunch could affect you During a credit crunch, [loans,](https://money.com/best-personal-loans/) [credit cards](https://money.com/best-credit-cards/) and [mortgages](https://money.com/best-mortgage-lenders/) might be tough to get. Banks and other lenders dramatically tighten their standards — meaning they’re much pickier deciding who is worthy of getting their money. This usually translates into higher [credit score](https://money.com/what-is-a-credit-score/) requirements for borrowers, higher interest rates on loans or both. Raymond James' Watsek recommends holding off on getting loans for big projects or new home purchases while a credit crunch is playing out. Because of the more onerous terms, a credit crunch is generally not a great time to take out any big loans, if you can avoid them. “Preserve your liquidity as best you can,” he says. In other words, try to have cash on hand to see you through the crunch, such as an [emergency savings fund](https://money.com/emergency-fund-too-small-inflation/) of at least three months — but up to a year or more is ideal, Watsek says. “Consumers can work to [keep their credit score high](https://money.com/7-ways-to-improve-credit-score/),” Skiba with Vanderbilt University says, “so that they will be ranked high by lenders when they are ready to lend.” On the other hand, Watsek says that if you have ample savings and don’t really need loans, a credit crunch could be a positive thing for your nest egg. “It could actually be a benefit to you because you get higher interest rates on your savings,” he says. Banks have recently lost a lot of deposits due to recent bank runs on top of the underlying trend of folks moving their money into non-bank accounts offering more attractive returns. To try to lure depositors back, Watsek explains that some banks are offering high interest rates. For example, many [certificates of deposit (CDs)](https://money.com/best-cd-rates/) are now [paying APYs of 4% and 5%](https://money.com/invest-cds-high-apy/), but it's unclear how long banks can afford paying out those rates. Ultimately, the effects of a credit crunch depend on your specific situation, Watsek says. Some folks may benefit from better interest rates on their savings, while people who need credit will likely be in a tougher spot. Whatever the case: “Definitely don’t panic,” Skiba says. “Crunches don’t last forever. They are transitory.” [7 Ways to Improve Your Credit Score Right Now](https://money.com/7-ways-to-improve-credit-score/) [7 Best Credit Repair Companies of April 2023](https://money.com/best-credit-repair-companies/) [The Fair Tax Act Aims to Abolish the IRS and Set a National Sales Tax. 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