What Is The Credit Crunch And How Does It Affect Me?

We’ve all heard the term Credit Crunch all over the news and media recently, but what does it actually mean and how will it affect you? In basic terms, the Credit Crunch is where there is a sudden reduction in the availability of Credit and loans and / or a tightening of conditions and lending criteria that is required to lend money from Banks and Financial Institutions. In a Nutshell, Banks either don’t have enough money to lend or don’t want to lend it due to high risks involved or to try to build back up their reserves.

How does it affect me at Home?

For a start, it’s going to be very difficult for you to borrow money for any reason. Interest paid on credit card purchases will go up as providers try to recoup losses. Getting a Mortgage will be difficult if not impossible as mortgage products have practically vanished from the market, with the ones left having very strict lending criteria. The good news is people with existing Tracker Mortgages will benefit as Central Banks reduce base lending rates to try to increase borrowing meaning less monthly mortgage payments.

How does it affect me at Work?

The Credit Crunch affects both Employer and Employee. If you’re an employer you will likely be noticing a downturn in sales caused by customers trying to save their money or repaying debts instead of spending it. This will be coupled with pressure on profit margins from increased supplier costs and increased discounts you will have to give to entice customers. Trying to get or increase an overdraft will also be very difficult and if you are lucky enough to get one be prepared to pay extortionate interest rates as banks try to recoup losses.

As an Employee be prepared to wave good bye to bonuses, pay rises and job security for a while. Hopefully you won’t be one of the unlucky many who lose their job due to bankruptcy or redundancy as firms try to get themselves in the best position to survive the Credit Crisis. You might even be asked to take a pay cut or drop in hours to keep your job.

How does it affect my Personal Wealth?

It will affect your personal wealth in two ways. The first is the value of your property is likely to decrease as people stay away from house purchases due to lack of funds, mortgages or confidence causing prices to fall. If you have a high Loan-to-value ratio you may be in danger of slipping into negative equity which can prove very tricky if it’s time to remortgage or sell.

The second place you will be hit is through your savings. Interest rates paid out on savings will soon become non-existent as the base rate falls and Banks try to give you back as little as possible to help their earnings. If you rely on interest from your savings to live on it might be a good time to look at alternatives, equally your money could be at risk if your money is kept in a troubled bank or building society.