The credit crunch could be spreading outside of subprime mortgages into consumer and credit card loans, warns BCA Research. As a result, the U.S. Federal Reserve Board needs to cut rates, the independent research firm says.

“The household sector faces increasing difficulty in staying current on its growing debt load given the drop in housing wealth and dwindling availability of credit,” BCA says in a research note. “While the rise in defaults related to residential real estate is well known, many consumers have begun to fall behind on non-housing related debt payments as well.”

“A more cautious banking sector is often a catalyst for a rise in defaults and the most recent tightening in lending standards is pushing delinquency rates higher on both consumer loans and credit card debt,” it adds.

“Credit conditions are far tighter than they were before the Fed began cutting interest rates, and financial markets are warning of real economic damage,” BCA concludes. “The Fed must act quickly to avoid a recession.”