Practical Applications of the Credit Crunch

Because of the move, here's a guest post today by Jonathan @ MasterYourCard. We traded posts a while ago, here's mine, but I was saving his for my move. This is a wonderful treat and the start of reading guest posts by people from the PFBloggers. A new perspective on the credit crunch. Enjoy!

Practical Applications of the Credit Crunch

Few of us need to the government to tell us what we already know – we’realready in a recession! Every day it seems the price of gas and food goesup, while the value of our homes and the buying power of the U.S. dollargoes down. Banks and other lending institutions continue to tighten theavailability of credit to help protect them from the weakening economy. Even though you may think that some of them might not affect you directly,you should be aware of some of the direct and indirect effects of the credit crunch on your family and your pocketbook.

First, banks are tightening up their lending standards for the consumerborrower. Whether it is for secured loans (homes, autos, etc.) or for unsecured loans (credit cards, signature loans) the availability of credit is becoming scarce. Only those with stellar credit profiles are finding many lending institutions willing to offer them loans of any type. Those who have credit histories with blemishes in them may find the credit spigot being turned completely off for the time being. What can you do tolessen the impact? Consider putting off major refinancing or debt purchases for the time being. Work on paying your debt down instead of trying to obtain new debt.

You may already be noticing that the credit card companies areaggressively reviewing their portfolio of accounts. Card issuers are closing accounts and increasing interest rates even as the prime rate(which most APR’s are tied to) decreases. Again, your best bet here is to make sure those payments arrive on time every month. Don’t apply for new credit cards and keep your balances low. Card issuers are looking for anyreason whatsoever to raise your interest rates – don’t give them a reason! If you think you may be heading for some financial turmoil, call your card issuers and start working with them ahead of time instead of putting off the problem until it is too late. Many are more than willing to help you manage the payments instead of letting you default – which means another loss for them.

You are also being affected in ways that you can’t see directly. Businesses use credit the same way you do and when they have trouble obtaining credit you can feel the impact through higher prices and stricter payment terms.

One example is the student loan industry. Student loans are financed by selling the loans on the open market. Recently many student loan providers have had no bidders for their student loan offerings – this is having a rippling effect through the entire education and student loan system. Some student loan providers are simply not writing any new loans. If you are a child or parent of a child attending attending college make sure you get your FSA(Federal Student Aid) profile submitted early. With less money to go around you need to make sure that you are first in line for whatever aid might be available.

Nobody knows for certain how long the economy will remain depressed; the best bet during tough economic times is to put off major spending and focus on repayment – a good task no matter what the economy is like. Keep your eye on the mail you get from your lenders and credit card issuers tosee what rate changes may be affecting you directly. If you are affected consider taking on, even temporarily, a second job to pay off the debt. You’ll find that by getting rid of debt and building your credit profile up that no matter what the future may bring for the economy you’ll have one less thing to worry about and a lot of extra money to go towards the things that make a difference in your life.