I have a Schwinn Crisscross that I am slowly making into something usable, I don't commute but the bike will be used to run down to the store for milk or anything small that I may need or have forgotten to pick up (about a 3.5 mile round trip and I would rather ride than take a car) things like that, I just put a rack on it and installed a shifter and brake lever that it needed so the bike is getting close.

I am trying to make this bike into what I want it to be with minimal money, yeah yeah I'm cheap! so am using lots of stuff that I already have, I am into it for $48 as it stands so far. The rack that I put on it was on a mountain bike with 26 inch wheels and the Crisscross has 700c the rack is pretty close to the tire but fits (I would say somewhere between 1/4 and 1/2 of an inch give or take) I would like to add fenders and was going to use the planet bike Hardcore hybrid/touring set.

My question is how much clearance is needed between the tire and the rack? can I fit a fender between the tire and rack with the kind of clearance that I have?... or should I say lack of clearance or will I need to get a different rack if I want to have fenders on this bike?

any and all input will be helpful, and a shot of the bike with the rack on it.

Based on the picture, I don't think you're going to get fenders in there and even if you did you wouldn't have enough clearance. I would recommend a new rack. Get one with adjustable legs. Maybe you could trade with the one you already have to someone that has a bigger one or sell and put the money towards something new.