A credit crunch happens when banks either become cautious with their money clinging to it rather than lending it out or they just cannot borrow the money themselves. Banks borrow money on the Internatitional Money Markets at much better rates than you could get.
The result of this credit crunch is that fewer people are able to get loans, credit cards and mortgages so things that we would buy if we had those credit facilities – such as houses, cars, holidays and so on – are no longer an option.
This of course has a very detrimental effect on the economy; people are spending less so the profit margins of all sectors in the UK suffer.
Why did it happen?
The USA led the way for the crackdown on credit because their mortgage market went into a severe slump. You’ve probably heard of the ‘chaos theory’ whereby if a butterfly flaps its wings a thousand miles away, on the other side of the planet, a hurricane will happen. That’s not a literal translation of the theory, but you probably get the drift. Basically, whatever happens to America’s economy will eventually have an aftermath effect on our own. This is especially true with the US Mortgage Market because a lot of U.K and European banks were also investing in the subprime lending there.
Should I be worried?
That largely depends how much you rely on credit and equally as much on how good your credit history and credit score are. It’s still pretty easy to get a mortgage in the UK but only if you have a flawless credit history.
People who don’t are going to find the going a lot tougher, whether that’s for a mortgage or a credit card or loan.
What’s going to fix it?
There are many factors and circumstances that must all fall into place before this situation improves. For instance the rate of inflation needs to fall along with interest rates, the stock market needs to be more buoyant, overseas economies – particularly in America – need to be stronger and we need more disposable income and better pay to enable us to buy more goods and services. In the main, it’s nothing we as individuals can do; it’s all dependent upon global finances and the cost of oil.
Stubsy is an entrepreneur and publisher of Credit Crunch a site dedicated to bringing you the latest credit crunch news and views with help and advice for your Personal Finances
You can keep up to date with other news from stubsy at his entrepreneurial and personal blog
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