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All You Need to Know about the Credit Crunch
What is a credit crunch?
A credit crunch is a situation in an economy where there is a sudden decrease in the availability of credit from banks and other lenders in order to reduce their risk. They may also increase the cost of obtaining credit by raising interest rates. It is a time of mild recession as the growth of debt is forced to slow, money is tied up in debt and not immediately available and there fewer liquid assets.
How did it start?
The global credit crunch we’re now experiencing was caused when people with poor credit ratings (or “subprime credit risks”) were unable to meet higher debt repayments to US mortgage brokers due to rising interest rates. As more mortgages were foreclosed in America (so properties could be repossessed and then sold on for a profit), their previously buoyant housing market nosedived. These subprime losses started in early 2006 and continued to worsen throughout 2006 and into 2007.
Debts often get sold to other financial companies around the world to help create one of their sources of money which can then be invested or lent to people or companies. With little debt being paid off, financial institutions like mortgage providers and banks have been unwilling to take on more debt themselves and have little money to lend, and so these effects have spread around the world. Some firms, like Northern Rock, have been too dependent on this source of finance and have suffered as a result. There is quite some debate about whether the blame lies with consumers for putting too much on credit and overspending or whether banks are the culprits for irresponsible, high-risk lending.
How does it affect me and what can I do?
To make sure they are no longer at risk, these companies have made it harder to get loans, mortgages, and plastic by tightening their lending policies, charging higher fees, and increasing interest rates. This affects you as it means you may have fewer methods to get out of debt, spending may be cut, and your repayments may increase. The credit crunch even affects job seekers as companies are less willing to take on permanent employees in case they have to make job cuts.
Now is the time to check your credit rating because if you want to borrow money, get a mortgage or remortgage then banks are more likely to lend to someone who is not deemed as a risky investment.
Be careful with credit cards and balance transfers. Try to pay them off or reduce the debt on them as interest rates are high. It’s also more difficult to get cards for new 0 per cent rates now and any cards you get may have lower credit ratings as banks are unwilling to be as generous as before.
The main market where the credit crunch is felt is in housing. Now is a good time to either improve your home so it’s ready for when the market improves too, buy a home at auction which has been repossessed, or get a mortgage with lowest rate possible if you’re coming to end of a fixed-rate mortgage. If you’re looking to sell your home to move or use the money to pay off debt then shifting to a smaller property or even renting until the economy recovers may also be a good idea.
Credit Check News posted on 29 November 2007
