What is a Credit Crisis, and is One Coming?

Apple Podcast Spotify

What is a Credit Crisis, and is One Coming?

Have you ever heard the term “Credit Crisis.” It’s a bit of a scary phrase, isn’t it? Anytime you say the word, “crisis” eyebrows raise, heart rates increase, and people pay close attention. I actually think the word “crisis” is overused today. If everything is a crisis, then nothing is a crisis. If we are not careful, we can become people who cry wolf so often that no one comes running when they are really needed. A crisis is really more like an emergency. A crisis is something that doesn’t come along very often. Let me use an illustration to differentiate between something that is urgent and something that is an emergency. Many years ago, I broke my foot (if you want to hear a funny story about how it happened, you should ask me). Breaking my foot was a bad thing. A really bad thing. I was in a boot for 4 weeks and couldn’t really use it for 6 weeks. But this was not an emergency. Yes, it hurt. Yes, it affected many things about my day-to-day life. But it wasn’t a crisis. Now if I had a heart attack that threatened my life, that’s a crisis. That’s a true emergency. My broken bone needed urgent care, yes. But a heart attack would need emergency care. So, in today’s episode I’m going to try to distinguish between these two concepts and answer the question – whether I think we are in a credit crisis.

First of all, some perspective on credit crises. I’ve lived through a few. 2008 was a year in which we saw a credit crisis so severe that it was dubbed the “Great Recession.” It was a year in which it felt like the spigot of economic growth was turned off at the source. Things just dried up. Business came to a screeching halt. We saw a domino effect of bank failures: Washington Mutual, Wachovia Bank, Bear Sterns, Lehman Brothers, Merrill Lynch, and AIG are all companies that were household names at one time – but now are the names of failed companies that were absorbed into other companies. The 2008 credit crisis came about because of many factors – but one of which was loose underwriting or loose lending. Let’s say, for a moment that you are in the business of loaning your personal money, and you loan money to a friend who owns a restaurant that is doing well. That’s a reasonable loan. You know them and they have a good business. But let’s say you loan your money to a complete stranger who happens to have a history of not paying his debts. In 2007, risky loans like this to people who did not have a history of paying their debts was commonplace. All you had to do was have a pulse and a social security number and you could borrow money from somewhere. More and more risky loans were taken, because the people putting the loans together didn’t have any real skin in the game. They were selling these loans to offload the risk to others, and the people buying them didn’t have any real sense of the risk they were buying. In short, money was too loose – it was being lent out without much thought or due diligence. In the end, bad loans eventually go bad. Once those loans started to go bad, it caused a cascading effect. Many of the entities that owned these loans were so intertwined, bad news for one spelled bad news for another. There were other factors, including “mark-to-market accounting,” but I won’t go into depth on that cause other than to say that the accounting principles of the time made other firms who had the strength to wait out to storm look worse than they really were. As in any crisis, when too many people start heading for the exit at the same time, financial panic ensues. The fallout was tremendous. The damage was widespread. This was a true credit crisis.

So, are some of the events of today rhyming with 2008? What are some of these events? Tricolor Holdings was a huge subprime auto lender. Subprime means they specialize in providing credit for people with lower credit scores. They just filed Chapter 7 bankruptcy, leaving thousands of creditors out in the cold. Additionally, auto-parts supplier, First Brands, filed for Bankruptcy. Jamie Dimon, CEO of the largest bank in the U.S. acknowledged that his bank had some exposure and that credit underwriting standards have probably gotten too lax again, not just in his bank but in big banks around the country. He said, “When you see one cockroach, there are probably more.” So, are there more cockroaches? Wolf Street put together a helpful graphic with some recent data reported by Equifax and Fitch. Subprime Auto Loan Delinquencies are near and all time high at over 6.5%. That trouble is not echoed among prime borrowers. As a matter of fact, if you look at all auto loan borrowers, the percentage of disposable income represented by auto debt or leases is at a pretty strong historical number. So, my best guess is that we are not in the beginning stages of a credit crisis, but I would say that we are in the early stages of a credit contraction. What I mean by that is that those borrowers in the world who have no margin for error – those borrowers who borrowed as much as they could and then hit a speedbump – we will see some of these go out of business as the creditors that loaned to them will experience some losses. Businesses and individuals who could afford lots of leverage when interest rates were low might be squeezed out of business now that interest rates are high. So, to go back to my earlier analogy, this is more of a broken foot than a heart attack. It will be felt, noticed, and painful in parts of the economic body. But it is not catastrophic and not yet at crisis proportions. So, if it is not yet a crisis, what are the implications for you?

Here are the implications:

If you are a Sub-Prime borrower (meaning that your credit score is maybe 640 or less), Auto Credit will be harder to get and more expensive. Work on your credit score by making your payments on time. That’s the single biggest determining factor to keep our credit score strong.

There may be additional high-profile bankruptcies. Don’t panic if you see this in the news. Some of these may be surprising. But this is part of the business cycle and actually healthy in the long run to remind businesses that there really is such a thing as risk.

Continue to prepare for a slowing economy. Many business owners we talk to a making money, but not as much as they made in 2022. Each year since seems to be a little less profitable than the last. Or perhaps you are working twice as hard to maintain the profit you had a couple of years ago. Expect this trend to continue. Don’t be afraid to take risks – but be very selective and picky about the risks that you take. Now, things can change. Geopolitical events can move markets in a moment. So, stay tuned to future episodes where we will certainly share if more concerns surface in the economy.

We love helping arm small businesses with information to help you better manage your business. If you want more of that, you should really be a client of ours if you aren’t already. And even if you already are, maybe you should deepen your business relationship with us. Start your next financial conversation with us today at foundationbank.org. It really will be worth your time. We hope you’ll subscribe to this podcast to it in your favorite podcast app and share it on social media. Until our next episode, God bless you.

-President Chad P. Wilson, CFP

Today’s episode of “Money Matters” was written and recorded by President Chad P. Wilson of Foundation Bank/McKenzie Banking Company on October 21, 2025. This episode does not constitute financial advice. Please consult a financial professional to discuss your specific needs. Any rates mentioned are subject to change and are accurate as of the recording date. Foundation Bank/MBC is an Equal Housing Lender, Member FDIC.