Surviving the credit crunch – a basic guide

Not so long ago, anyone using the term credit crunch would have been met with a puzzled look. Today, barely a day passes without this phrase being repeated again and again on television or in the newspapers. Nic Cicutti explains what it is and how to protect your family from it's effects.

What is the credit crunch?

It is a crisis that has affected many banks and financial institutions since the summer of 2007, when it became apparent that millions of mortgage borrowers in the US were no longer able to repay their loans.

For many years, banks offered mortgages to people with poor credit histories. The loans were set at low rates – but only for an initial period. As soon as those rates started to rise, so did borrowers’ inability to pay.

This meant banks started to become unwilling to lend each other money. In turn, they then clamped down on fresh loans to their own customers. Or if they did, it was at much higher rates of interest. 

• Borrowing: a basic guide

How does this affect us?

The financial virus has affected all the world’s money markets, including here in the UK. The most high-profile victim has been Northern Rock. Basically, Northern Rock ran out of money to service the interest on money it borrowed and was lending its own mortgage borrowers.

The effect of this has been simple: regardless of which bank or building society, credit is now harder – and more expensive - to obtain than a year ago. This applies not just to mortgages but also personal loans, credit cards, even overdrafts.

For up to 1.4m borrowers whose fixed mortgage deals come to an end during 2008, the prospect of much higher costs going forward is now real. First-time homebuyers and those with poor credit histories are finding it more difficult to obtain loans. 

• Mortgages: a basic guide  

It’s worth remembering that:

• the credit crunch does not affect everyone equally. The majority of existing homeowners with good or reasonable credit histories should not find it too hard to get mortgages and other types of credit, even if they may have to pay more than, say, a year or two ago
• the Bank of England is expected to cut its base rate in 2008 and pump more money into the money markets, making it easier to borrow money. This will bring down credit costs over 2008 and 2009

What can you do to help yourself?

There are a number of steps you can take.

• Check and protect your credit record: if there are mistakes in what a reference agency knows about you, it can be corrected. See the box on credit reference agencies above.
• Make sure you always pay all your bills on time.
• Target your credit applications carefully: a scattergun approach is more likely to lead to refusals. This leaves a footprint in your record – and other credit providers then wonder why you were rejected.

  Debt advice
  National Debtline Citizens Advice Bureaux Consumer Credit Counselling Service

  Spend more wisely: price comparison sites will help you cut the cost of your home and motor insurance, mortgages, loans and credit cards, gas and electricity, even your weekly shopping.
• If in trouble, always seek out expert help. Be upfront with your lender about any repayment difficulties. There are also many sources of free independent advice.  
• Financial help from the UK Government 

Author

Nic Cicutti is a journalist and broadcaster. An award-winning former personal finance editor at The Independent and editor of the Financial Times’ website FTyourmoney, he tries to practice what he preaches but doesn’t always succeed.

Your thoughts?

What steps have you taken to protect your family's finances in the face of the threats that Nic has outlined? Have you got any tips to add to the above? Use the comments system below to share your response.