The Credit Crunch Unzipped! Irresponsible Banks Start The Slide

The Credit Crunch Unzipped!
Irresponsible Banks Start The Slide

Last year you were able to take that vacation and upgrade your vehicle. This year you are wondering if your mortgage payment will be made on time. Gone are the once a week dinner and a movie night. Today, it’s shall we eat hot dogs or pasta for supper. And now you are left with trying to figure out what happened.

You have finally earned that third week vacation and you just got a raise to boot! This time, a year or two ago, things were going pretty well for you. You were a month ahead on your mortgage payment. You had traded in your dilapidated vehicle for a newer model and you just spent the last week of your vacation with your family on a camping get-a-way. This year you are wondering if you should make pasta or hot dogs for dinner. How did this happen? When did all this change? Demystifying the credit crunch.

Seemingly complicated, the credit crunch in reality breaks down to spending more than you earn. Or rather, the lending institutions loaning moneys to persons with less than desirable credit. The resulting effect is higher than average defaults on mortgages and loans. All the while consumers began relying on credit cards to meet monthly expenses and then defaulted on payments. Thus avalanching into higher interest rates and more scrutiny and selectivity by banks to extend loans.

The credit crunch began when, what first seemed like a good investment for a home buyer, property soon became a financial burden. Assuming the home buyer had the intent of selling the home prior to the interest rate jump, as the real estate economy began to slump the homeowner was no longer to sell their property for profit or even to break even. Therefore causing the homeowner to either sell at a loss or simply have the bank foreclose on the property.

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The long and short of it is that when banks loaned money to those with imperfect credit they did so by utilizing an adjustable rate mortgage. Which allows for a low initial interest rate - very attractive for first time home buyers - then the interest rate jumps to the prevailing rate several years later. Oftentimes this caused a significant increase in the interest which caused an increase in the monthly mortgage payment. The cause ended with the effect being that homeowners became delinquent on their mortgages and in some cases, forcing banks to foreclose on their homes.

The added one-two punch to the credit crunch was the inflated price of gas and food items. With fuel prices creeping to an all time high the work force found themselves pumping more money into their vehicles just to get back and forth to work. This snowballs into consumers coming up short on monthly living expenses as well as extra expenditures.

Taking this into account, credit lending agencies hiked up the interest rate to try and recoup their anticipated losses. This rise in interest rates inhibited consumers to try and stretch their weekly dollar. Basically opening a Pandora’s Box of sorts.

The United States federal government stepped in to help ease the financial burden on it’s people and lowered the federal interest rate to try and spur the economy. However, retailers are finding the cuts not as effective as they had hoped. And because banks are tightening up their policies on lending, those with slightly less than perfect credit are finding themselves stretching their paychecks to just to survive week to week.

Surviving the credit crunch boils down to living within ones means and anticipating the future. As nobody could have predicted this financial dilemma, persons with foresight could prevent being tangled within this credit crunch again. Knowing and understanding your credit and its effects is the first step in demystifying the credit crunch.