The Effects of the Credit Crunch

March 22nd, 2008

No matter how insulated you think you have made yourself from the effects of the Credit Crunch it will effect you. I have outlined below the various arms of the global financial markets and how the crunch will effect each of them.

Getting a mortgage is undoubtedly much harder than it was six months ago and even though the Bank of England has cut interest rates twice since December, the cost of borrowing is continuing to rise. A year ago, when interest rates were at exactly the same level they are today, 5.25 per cent, the cheapest two-year tracker mortgage was offered by Cumberland Building Society at 4.73 per cent, more than 0.5 percentage points below the base rate. Today, the cheapest is offered by HSBC, and comes in at 5.24 per cent. On a £250,000 mortgage, that works out at about £100 more each month.

The jobs market is the key to whether the UK economy can escape the worst effects of the credit crunch. Unemployment, and the fear of it, kills confidence. This is what went wrong in the economy during the last recession, in the early 1990s, when the property market and consumer spending collapsed, creating their own downward dynamic. Now it is pushing America into recession. The UK’s exceptionally flexible labour market and moderate wages growth should protect businesses, investment and employment from too much harm. But high inflation and a squeeze on living standards feeding through to higher pay demands could put that at risk.

Although stock markets have been falling, commodity prices have continued to soar in recent months. Anyone nearing retirement should already have transferred most of their pension money away from equities. For those who have 10 or more years to go, now is the time to sit tight and keep making your monthly contributions. Continuing to drip feed new money into a falling market ensures that you are buying stocks when they are at their cheapest

Credit card and personal loan providers are now cherry-picking their new customers, as well as cutting levels of risk within their client portfolio. As a result, millions of people have had the limits on their credit cards slashed, sometimes by as much as 90 per cent. Others, such as 161,000 customers of the internet bank Egg, have been told their accounts are being closed. But for those with a good credit score, it is still possible to get credit at cheap rates. Lenders such as Moneyback Bank and Barclaycard are offering personal loans for as little as 6.7 and 6.8 per cent APR respectively. Virgin Money, Abbey and even Egg are still offering 0 per cent balance transfer deals on credit cards, with no interest to pay for over a year.

As banks have struggled to raise the money they need in the capital markets, they have been forced to offer more attractive savings rates, to try to persuade more customers to put their money with them. As a result, it’s now possible to get rates as high as 6.5 per cent on instant access savings accounts, one and a quarter percentage point above the Bank of England base rate. Alliance & Leicester is even offering a rate of 10 per cent for cash ISA customers who also switch their current account. It’s important not to save more than £35,000 with one provider, however, unless it is the Government-backed National Savings & Investments or Northern Rock. Although the Government has strengthened the Financial Services Compensation Scheme, which protects consumers if banks goes bust, it only promises to guarantee the first £35,000 of any savings.

The effect of the credit squeeze on inflation is hard to gauge. The only direct effect will be to make credit more expensive, especially for less credit-worthy customers of the banks. So, for some, overdrafts, car loans and mortgage repayments will cost more to arrange than was the case in the past. More widely, the squeeze on investment and consumption that comes with a credit squeeze will tend to depress demand and dampen inflation. Business plans are cut back; consumer promotions postponed; holidays and meals out curtailed. However, there would have to be a truly catastrophic collapse in demand to push back the current round of increases in oil and other commodities such as food.

So it is a mixed bag. While it is true that everyone will be effected some will be more effected than others. What is clear is that by being prepared the more sensible will be able to mitigate those effects and thereby weather the storm.

This entry was posted on Saturday, March 22nd, 2008 at 1:19 pm and is filed under Personal Loans. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.

The Effects of the Credit Crunch

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