Cash In On The Credit Crunch!

The worldwide credit crunch means banks are desperate for cash, giving you an opportunity to boost the interest rate on your savings.

Financial markets around the world are in the grip of a crippling credit crunch, which is bad news for borrowers but good news for savers.

This crisis has been caused because US banks have been giving mortgages to homebuyers who are poor credit risks. These `subprime' borrowers have been defaulting on their home loans in their millions, causing a huge rise in bad debts among US lenders. However, this is far more than simply an American problem, because these loans have been packaged and sold to investors all around the world.

In other words, banks are locked in a global game of `pass the parcel', with no-one quite sure which financial firms have the greatest exposure to this toxic waste. Thus, banks are afraid to lend to any firm which doesn't enjoy a first-class credit rating. This fear has caused inter-bank lending rates to soar, making it more expensive for banks to borrow in the wholesale market.

Indeed, three-month sterling LIBOR (the London Interbank Offered Rate) currently stands at 6.59%. This is 0.84% above the Bank of England base rate of 5.75%, whereas three-month LIBOR is usually much closer to the base rate.

Of course, the rise in inter-bank lending rates has made it more expensive for banks to fund mortgages, personal loans and other lending. Thus, borrowing rates have been creeping up recently, with several leading mortgage lenders hiking the cost of their variable-rate deals. Then again, although credit worries have made life expensive for borrowers, they have also created opportunities for sensible savers.

Saving Rates Soar

As banks are desperate to get hold of as much ready cash as they can, they've been beefing up their savings rates in order to get more money into their coffers. In addition, the base rate has risen from 4.5% in August 2006 to 5.75% today, which has given a much-needed lift to savings rates. As a result, savers are enjoying the highest rates since the turn of the century. Yippee!

So, how can you take advantage of these super savings rates? Obviously, the first step is to open a new savings account which pays a market-beating rate of interest. You can then transfer over your existing savings pot, as well as sending future deposits to this table-topping account.

If you need quick, no-strings access to your money with no penalties, then I'd recommend the following Best Buys:

Top easy-access savings accounts for £250+

Source: Fool.co.uk's independent savings search engine

That's the ever-popular Best Buy instant-access savings accounts out of the way. Alternatively, if you have a tidy sum put by and are willing to tie up your money for a long period, then you can earn even juicier rates. By putting money into a fixed-rate or fixed-term savings account, you can take advantage of the banks' desperate desire to hold on to cash. Here are the most eye-catching deals on offer:

Top fixed-rate and fixed-term savings accounts for £1,000+

Source: Fool.co.uk's independent savings search engine

As you can see, you can earn the thick end of 7% a year if you're prepared to keep your hands off your money. For example, £10,000 placed in ICICI's one-year bond would earn a tidy £685 in interest (before tax) over the next twelve months. Even if you' only want to tie up your cash for six months or so, you can earn between 6.86% and 6.96% AER until next June.

Finally, as I warned in Inside The Mortgage Massacre, the credit crunch is far from over. Indeed, some pundits predict that its effects could persist for a further six months to two years. However, forecasters also predict the Bank of England will cut its base rate several times next year. Thus, while rates remain high, now may be the best time to stash away your cash...

More: Find great rates in the Fool's savings centre | Are Your Savings Safe? | What's The Point Of Saving?