ANALYSIS-US credit mess chips away at consumer financing

By Emily Kaiser

WASHINGTON, Dec 7 (Reuters) - From electronics stores to car dealerships, U.S. lenders are subtly scaling back easy financing terms as tightening consumer credit conditions spread beyond the housing market.

With signs that spending is already sagging under the weight of the housing downturn and steep food and energy prices, retailers are reluctant to take away too many of the popular promotions for fear of turning off shoppers, retail and credit analysts said. That means you can still buy a big plasma television with zero-interest financing, but this holiday season you may have less time to pay it off before interest payments kick in.

Automakers are still advertising no-interest loans, yet the average interest rate on new car sales has crept up since housing-related worries began roiling financial markets this summer.

Anecdotal evidence suggests credit card issuers are also showing more restraint, approving applications by the thousands but tweaking some of the fine-print fees or policies.

"There's definitely been some tightening. Most of the changes we've seen have been fairly subtle," said Curtis Arnold, consumer advocate and founder of CardRatings.com, which tracks the credit card industry.

"We've heard more complaints about credit lines being decreased. We've been seeing the length of introductory

(offers) diminish. Instead of giving 12-month offers at zero percent interest, we're seeing nine or six months. The fees on balance transfer offers have gone up," he said.

Several major credit card issuers contacted by Reuters declined to comment, saying information about their financing terms was proprietary.

CONSUMERS HOLD BACK

Consumer spending is always closely watched because it accounts for the lion's share of U.S. economic activity, but with the housing downturn and credit market strains threatening to stall economic growth, investors are paying even more attention to this year's holiday shopping season.

Retailers are looking to strike the right balance between financing offers that entice buyers, and generosity that unnerves banks worried about mounting consumer debt and rising delinquencies.

The ratio of debt to personal income hit a record high of 138 percent in the third quarter of 2007, Merrill Lynch analyst David Rosenberg said.

Banks have already taken a $50 billion hit from bad debts tied primarily to the subprime mortgage mess, and that has left many lenders more cautious about a wide range of financing.

Early data suggests shoppers are feeling cautious, too.

According to the National Retail Federation, more than 147 million shoppers hit the stores on the weekend after Thanksgiving, the traditional kickoff to the holiday shopping season, up a solid 4.8 percent from last year. But the average amount spent per customer was down 3.5 percent to $347.44.

That weekend has become one of the biggest for sales of big-ticket items such as televisions. Goldman Sachs analyst Matthew Fassler said electronics chains were still offering zero-interest financing deals, though some had modified terms.

Circuit City CC.N was offering an interest-free term of 12 months, down from 18 months a year ago, he said.

At car dealerships, the average interest rate paid on new vehicle purchases rose in September and October even though the Federal Reserve lowered its trend-setting federal funds rate in each month to insulate the economy from tightening credit.

According to Edmunds.com, which tracks auto industry incentives and pricing, the average interest rate reached 7.42 percent in October, up from a year low of 7.12 percent in July.

"They really have not reflected these (Fed rate) declines in their rates. That's one way of trying to protect themselves" from the risk of worsening consumer credit conditions, said Edmunds.com analyst Jesse Toprak.

FED WATCH

Fed officials are watching closely for signs that tightening credit terms are restraining consumer and business spending. Fed policy-makers meet next week to decide whether to cut interest rates further, and Wall Street expects at least another quarter-point reduction.

The central bank's latest survey of loan officers showed that about one quarter of banks were tightening standards for consumer loans, increasing credit score thresholds, and raising interest rate spreads over their cost of funds.

In a speech last week, Fed Vice Chairman Donald Kohn said outside of the well-documented problems with adjustable-rate mortgages, households appeared to be paying their bills with only a slight increase in delinquency rates.

However, if financial markets remain turbulent, "it would increase the possibility of further tightening in financial conditions for households and businesses," he said.

"Heightened concerns about larger losses at financial institutions now reflected in various markets have depressed equity prices and could induce more intermediaries to adopt a more defensive posture in granting credit, not only for house purchases, but for other uses a well," he warned.

Kohn and his colleagues have made it clear that they stand ready to lower interest rates further should credit conditions worsen. The question is whether lenders will filter those lower rates all the way down to the car lots and stores.

((emily.kaiser@reuters.com; +1 202 310 5444; editing by Clive McKeef; Reuters Messaging: emily.kaiser.reuters.com@reuters.net)) Keywords: USA ECONOMY/CREDIT

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