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Shields & Co
sales@shieldsandcompany.co.uk
Lenton Office
Tel: 0115 941 8885
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Tel: 0115 916 6160
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Tel: 0115 939 7600
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Tel: 0115 916 6162
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Tel: 0115 941 1177
Additional Information
"The Credit crunch” what does it mean?
In a nutshell, the ‘credit crunch’ is the name given to the ‘snowball effect’ financial institutions are currently experiencing due to a lack of available money across the market. As money becomes tighter, banks are not longer able to lend or borrow from one another, and as the credit crunch effect worsens, financial institutions compensate for this shortfall through their customers by increasing fees and rates on their mortgages, loans, and credit cards.
Why is there a credit crunch?
The beginnings of the credit crunch can be traced back a year ago to America, when people with a poor credit history were allowed to take out mortgages, called sub prime mortgages, which they were later unable to repay. With falling house prices and rising interest rates, these missed repayments led to a vast increase in repossession levels.
So why is the credit crunch affecting the UK?
Well, compared to borrowing from America’s central bank, the Federal Reserve, buying other banks’ loans has been a far cheaper way to borrow. Because of this, many of the US mortgages, which people with poor credit history were eventually unable to repay, were sold on to other US banks and then on to other banks and investment banks across the world. Banks in the UK bought a considerable number of these loans.
Because these so called ‘sub prime’ mortgages have been sold and resold many times over, banks simply do not know how much bad mortgage business they have bought, let alone what the impact has been on other banks. As a result, banks don’t want to lend money to each other anymore and the continuous movement of money, what bankers like to call ‘liquidity’, has dried up creating what is now Known as the credit crunch. Taken from www.moneyfacts.co.uk