IS IT POSSIBLE TO AVOID YET ANOTHER CREDIT CRUNCH?

INTRODUCTION
A credit crunch is a reduction in the general availability of loans (or credit) or a sudden tightening of the conditions required to obtain a loan from the banks. A credit crunch generally involves a reduction in the availability of credit independent of a rise in official interest rates. In such situations, the relationship between credit availability and interest rates has changed, such that either credit becomes less available at any given interest rate, or there ceases to be a clear relationship between interest rates and credit availability (i.e. credit rationing occurs). During a credit crunch, consumers may find it increasingly difficult to get any kind of loan, and they may also find that their debt becomes increasingly more expensive and hard to manage. The credit crunch affects consumers and financial services businesses, making mortgage lending less profitable and harder to access. The 2007/2008 credit crunch has completely changed the face of the global economy, with hundreds of business (including some of the foremost financial services companies in the world) on the brink of collapse. Governments, including the UK government, have had to expend billions to restore liquidity to troubled economies.

CAUSES

Major economic problems such as a credit crunch can be caused by a period of recklessness in the economy. Low interest rates, very cheap credit, and soaring house prices, irresponsible lending is often the result. However, once a tipping point is reached, the true extent of bad debts emerge, credit becomes more expensive and house prices tumble, a credit crunch is usually the result. A credit crunch is usually very bad for businesses, particularly those with high levels of exposed risk to bad debts. Low consumer confidence and lower availability of capital can damage business in almost all sectors. When a credit crunch becomes serious, credit becomes extremely strained. The companies or institutions that caused the credit crunch in the first place may find it very difficult to survive in this kind of economic climate. When a credit crunch remains for some time, cheap and easy borrowing becomes a thing of the past. The 2007/2008 credit crunch was caused by sub-prime mortgage lending to poor credit borrowers during the early part of the 2000s. Massive volumes of bad debt were packaged up and sold internationally, meaning that throughout the world numerous companies had heavy exposure to the sub-prime market. Once interest rates soared and house prices started to fall, the market quickly collapsed, with financial services companies worldwide at serious risk.


Beating the Credit Crunch

The world keeps on finding effective ways to overcome the present economic crisis.. The credit crisis has already come a long way and millions of people have experienced its humiliating financial effects. To beat the credit crunch, people should stay optimistic that they will be able to win the bout against financial instability. There are a lot of simple methods you can use to conquer your present financial situation. Credit cards are the main reason for accumulating debts since most cardholders can go way out of their spending limits. Therefore to prevent this paying in cash would be a wiser option. The use of cash or ATM is highly recommended so you don’t have to worry about paying your monthly credit dues which of course has additional interest. Reducing the use of credit cards can save you from paying high interest rates which are usually charged by creditors.



Budget to Beat the Credit Crunch

Take note of the things that you really need to avoid unnecessary expenses. One should know the difference between a necessity and luxury. Only buy items which are a necessity at home and try to stay away from those of least importance. Also, it will be best to plan your menu for the week so that you will have a guide on the ingredients that you need to buy. You should create a shopping list before heading to the grocery and remember to stick to it. Do not buy goods which are not on your lists. Doing so will help you maximize your budget. Budgeting is yet another essential step to beat the credit crunch. Setting up a budget to work around will help you to prioritize on more important things and items that you actually need. If you want to keep track of your spending activity, it is highly encouraging to keep a budget diary. You should list all the things you have bought and at the end of the day go over it to assess whether you were able to maximize your allocated budget. Keeping track of your expenditures will prevent overspending.

Money Management
Proper money management is absolutely the best way to financial freedom. You do not have to go through the process of debt management if you only know how to properly manage your funds. While you still have the chance, try to save as much money as you can. At least you know you can count on your savings when you are faced with a situation like this. Try not to be dependent with credit companies instead go for more effective means to support yourself and family.

CONCLUSION

So it is not impossible to avoid the credit crunch Most people at sometimes during their lifetime will face a credit crunch, unless they are wealthy. Some circumstances which are beyond our control can make it impossible to meet our credit obligations. Thousands of people have lost jobs in the past year and slipped deeper and deeper into debt. To prevent a credit crisis of your own, start saving pennies now for a tight financial situation. Keep in mind, mortgage payments, car notes and utility bills roll in monthly, and funds are needed to pay for our basic needs. Saving each pay period will build a nest egg to fall back on in case of emergency. Consider ways to pinch pennies to avoid a credit crunch. Buy only needed items

REFERENCES:
www.wikipedia.com

www.mortgages.co.uk

Submitted by: Amarjot Singh

MBA 1 C