by : Tom Heath

Over the last 6 months we have heard about a ‘credit crunch’that is affecting the global economy.?This credit crisis has resulted in many people struggling with theirpersonal debt and seeking advice from companies.? This situation raises many questions for mostpeople who do not work in banking and finance.?This article provides a brief overview of this ‘credit crunch’ and how itwill affect you.

What is the ?

The term ‘credit crunch’ refers to a condition in the globalmarket where borrowing is difficult to obtain. Banks and investors become lesswilling to lend money to both individuals and corporations.? This drives up the price of debt productslike credit cards or loans.

What caused the credit crunch?

Since 9/11 and the dotcom crash, central banks loweredinterest rates to allow the global economy to recover.? This resulted in a boom in the ‘sub-prime’mortgage market in the US.? This means that debt products were sold inhuge numbers to people on low incomes.?Typically these debt products were sold at low introductory intere strates.? At the end of the introductoryperiod their interest rates, and repayments, rose significantly.? Many of these people on low incomes have beenunable to maintain their repayments.?This has resulted in the repossession of a record number of homes.? The banks then have to write off these debts,effectively losing most of the money lent out.

That happened in the US,why does it affect Europe?

Banks in Europe bought these sub-primeloans that were pooled into financial products called collateralised debtobligations.

These banks are now left with financial products that are worth less andalmost impossible to sell.

How does this affect me?The cost of borrowing will continue to rise.? This means that if you currently have anydebt, for example credit cards, loans or mortgages you will see your interestrates go up.? If you do not have any debtbut are applying for a credit card, loan or mortgage you will find itincreasingly difficult to have your application accepted.? This is due to stricter criteria regardingcredit application approval.

The overall effect of the credit crunch differs depending onwho you speak to.? Some say we are oncourse for a global depression similar to that caused by the Wall Street Crashof 1929.? Others say that this is just aminor correction of the World’s markets and the crisis will soon stabilise.

The latter may be hard to believe when you consider that arecord number of people are seeking advice from a , having their homesrepossessed or are being declared bankrupt.?It would appear that the effects of the credit crunch are going to bewith us for some time to come.?