It’s impossible to review any of the country’s major (or even minor) media sources today without repeatedly coming across the term “credit crunch.” MSN.UK, BBC, Guardian, Telegraph and others not only report regularly on the topic, but often have whole sections devoted to it. We are no exception of course: browsing through our site a visitor will view numerous articles where we have used 2008′s biggest finance catchphrase.
So, it might come as a surprise that a recent Zurich report states that 21% of Britons believe that the credit crunch is nothing but a media sensation: a way, perhaps, to increase readership, viewership, and website visits. It also stated that less than a third of Britons (29%) have any plan to optimize their finances, essentially spending as usual. All this is in line with a Post Office report we noted here earlier, which also confirmed that many Britons, even those aware of the credit crunch, have no plans to change their spending patterns. In sum, a significant portion of us either don’t believe in the credit crunch or, if we do, aren’t altering our current personal finance habits in any way despite the risks involved.
That may be so because for those of us who are not economics dons, the very term “credit crunch” may be difficult to understand. If you still have your job, and your credit or mortgage rates haven’t increased, it might be difficult to see how this constantly hyped “credit crunch” is affecting you. The price of food and petrol is up, of course – but what’s that to do with credit?
It’s impossible to summarize all the macro and microeconomic aspects of a credit crunch simply, but Fool.co.uk did a reasonably good job in a recent Web article. It showed how even a 1% rise in interest rates can increase a 100,000 mortgage by 80 per month. In a similar vein, if that same mortgage was coming up for a renewal, you could pay up to 210 more per month. You will also find much more stringent terms on a renewal, since lenders are being much more selective as to whom they lend to and the terms borrowers are given.
Even if your mortgage terms don’t change, the value of your home could – in a downward fashion. Standard and Poor’s (S&P, a global ratings agency) reported in the Guardian in July that home values could fall so severely this year that 1.7 million homes could have negative equity: that is, homeowners will owe more on their mortgages than their actual homes are worth. S&P predicted this trend will continue well into 2009.
There are other powerful ways the credit crunch could affect you, even if you have no debt at all. Companies also find it more difficult to borrow money they would otherwise use to expand and invest. MSN.co.UK reports that in June corporate insolvencies were up 15% on the year. That means they will hire less, and give fewer and smaller bonuses. In other words, the credit crunch may be hindering you from getting a job or a raise.
Zurich Business Development Director Tony Solomon stated that it was crucial for Britons to actively and prudently manage personal finances in light of the present economic downturn.