For a nation of consumers heavily dependent on credit, signs are growing that today's rough times could be the beginning of a stark new reality.
Is America's long era of easy credit over?
Experts say that even when the current credit crunch eases, the nation may have maxed out its reliance on borrowed cash.
“I think we're undergoing a fundamental shift from living on borrowed money to one where living within your means, saving and investing for the future, comes back into vogue,” said Greg McBride, senior analyst at Bankrate.com. “This entire credit crunch is a wakeup call to anybody who was attempting to borrow their way to prosperity.”
Experts say a prolonged period of tighter credit is ahead.
U.S. consumers will find it much harder to get a credit card, and to carry large balances. Late fees will rise and lines of credit will be reined in.
After years of buying homes with interest-only loans, or loans that allowed people to borrow more than the value of the home, substantial payments and downpayments will be required. Interest rates are also likely to rise.
Lenders, far more wary of risk, have tightened the standards they use to judge potential borrowers. Regulators will be looking over their shoulders.
The changes cap three decades in which U.S. consumers – with businesses and government – have run up ever-increasing debt.
Americans became accustomed to financing purchases large and small with plentiful credit cards, easily approved loans for cars and the latest conveniences, and by siphoning the equity in their homes.
Lenders did far more than just make credit plentiful. They aggressively marketed it as a necessity, a way for smart consumers to leverage themselves into a better lifestyle.
The portion of disposable income that U.S. families devote to debt hit an all-time high in the second half of last year, topping 14 percent, figures from the Federal Reserve show. When other fixed obligations – like car lease payments and homeowner's insurance – are added in, about one of every five household dollars is now claimed by bills.
Americans, borrowing to cover ordinary living expenses, have all but abandoned saving.
The U.S. personal saving rate dropped to well below 1 percent in late 2007 and early this year, according to the federal Bureau of Economic Analysis.
The figure has edged up in the last few months, but the actual savings rate may still be near zero, given that many people are covering living costs by using credit cards or money saved earlier, according to the BEA.
The lack of savings is a sharp contrast with the decades after World War II. Americans routinely saved more than 10 percent of their income in the early 1970s.
Now, many families spend virtually all their incomes covering living expenses, and even that is not enough.
“In the credit era, which is like living on steroids, you're not saving money, you're not breaking even. You're actually borrowing 20 to 30 percent,” said Robert Manning, author of “Credit Card Nation: The Consequences of America's Addiction to Credit.”
Meanwhile, consumers have begun showing signs of a change in mind-set, putting off purchases, buying less expensive substitutes, going out to eat less, and rethinking their propensity to do so on credit.
Consumer borrowing fell for the first time in more than a decade in August, the Federal Reserve recently reported.
The decline, at annual rate of 3.7 percent, reflected a sharp drop in the category of borrowing including auto loans and a smaller decline in the category including credit cards.
“We're going to see some fundamental changes in consumer behavior,” said Frank Badillo of TNS Retail Forward, a consulting and market research firm in Columbus, Ohio.
He and others cite the reaction after gasoline reached $4 a gallon last summer. Prices have eased considerably since then, but consumers may have decided that the good old days of very cheap gasoline are over.
They've moved to buying smaller, more efficient cars, and trying to reduce the miles they drive. Demand for homes in outlying suburbs has declined.
Like gasoline prices, the availability of credit should improve once the current crisis eases. But consumers are confronting what some see as a long-term change.
The modern era of easy credit really began with the deregulation of the late 1970s.
In a 1978 Supreme Court decision, banks won the right to charge whatever interest rate their home state allowed and to do so across state lines. States repealed usury laws capping interest rates.
When inflation soared in the early '80s, banks aggressively marketed credit cards as a good deal: The interest rates were high, but not as high as inflation.
In the recession of 1990-91, banks who saw their profits tightening seized on the margins available by lending more to consumers.
When Congress eliminated income tax deductions for interest on credit cards, banks pushed home equity loans, encouraging people to take money out of their homes to pay off the credit cards.
As families took on debt, they were encouraged to follow a rule of thumb: It's OK as long as you don't devote more than 25 percent of income to borrowing costs.
Lenders, though, found a way around that. The 20-year home loan was repackaged as a 30-year loan and lenders stretched three-year car payment schedules to seven, masking the extent of the debt load.
The industry came up with subprime loans in the 1990s, then used them to encourage consumers with checkered credit history to buy homes.
When very low interest rates early this decade sent home prices skyrocketing, and Wall Street demanded even more lending to feed a market for mortgage-backed securities, lenders went into overdrive.
Consumers could buy with no money down and no documentation of income and were encouraged to borrow against the rising value of their homes.
Before the housing bubbled popped, many consumers were pulling money out of their houses to pay for expenditures – from boats to big-screen TVs – well beyond ordinary living expenses.
Over the years, economists have tried to figure out when, if ever, consumers might finally reach their debt limit.
But each time, Americans have proven far more resilient than pessimists imagined, financing their spending by borrowing.
Consumers “think they're doing fine by their parents' standards,” Manning said. “But boy, have they fallen far behind.”