What is the Credit Crunch?
The credit crunch is a term that refers to lack of funds across the board for all kinds of financial companies such as banks and credit unions. It all started twelve months ago in the US when lending institutions allowed people with poor credit to have mortgages to buy homes with rather than people with solid savings accounts. When these people could not repay their mortgages, the result was a lack of liquidity that has reached global proportions.
Banks around the world buy and sell to each other. These bad debts - or sub-prime mortgages, as they are called - in the US were sold on to other banks across the world - bought and sold many times over - and so no one bank can tell how much bad debt they have purchased. But they now don't want to buy and sell with each other anymore, for fear of purchasing more debt that cannot be repaid.
This has the flow-on effect of causing the value of the share market to tumble and freezing the world's economy. Interest rates on mortgages and credit cards have increased, as has the price of utilities, fuel and other necessary commodities for the man on the street. We need to look at the ways in which we spend money and see if they can be changed to lessen our debts. Current tighten has resulted in some rate cutting which has lowered the rate on home loans and also term deposit rates.