How To Survive The Credit Crunch

Everyone seems to think a financial meltdown is just around the corner. But with a few simple steps you can shore up your finances to protect against almost any eventuality.

Doom! Desperation! Despair! I think pretty much that sums up the financial press over the last few months. Apparently the world is coming to an end, in a financial sense anyway. Bad news makes good copy unfortunately so the papers (and The Fool) are awash with gloomy forecasts about the so-called `sub-prime mortgage crisis'. Personally, I don't think things will turn out to be nearly as bad as some of my fellow writers here at The Fool are predicting. But I agree that conditions will almost certainly get tougher. So it's a good idea to make sure your financial situation is as robust as it can be. 1. Don't Panic The first step is to remain calm. Rushing financial decisions is never a good idea and if you've got good financial habits (such as keeping your debts to a minimum, saving on a regular basis and regularly switching to get a better deal) then you shouldn't really have too much to worry about. The fundamentals of good money management rarely change to any significant degree. 2. Remortgage Due to the credit crunch, some mortgage providers are tightening up their lending criteria. This means you may have fewer options when you come to remortgage, especially if you have specialist needs (for example, if you are a buy-to-let landlord, are self-employed or have a bad credit record). Whereas before, you may only have needed a 10% deposit to bag a good deal at a decent rate, now a 25% deposit may be required. What's more, interest rates have gone up five times in the last 18 months, pushing up the rates available to new borrowers. So I recommend you start looking around well before you come to end of any fixed or discount rate you're currently paying on your mortgage. Speak to a broker to get an idea of how much more you're likely to have to pay when your current deal ends, so that you can plan accordingly if you're unable to get a better rate. And if you think you're going to have trouble making higher payments, speak to your lender as soon as possible so that you can keep your credit history clear of blemishes. One positive from the credit crunch, at least as far as mortgage borrowers are concerned, is that interest rates are likely to come down by 0.25% or perhaps even 0.5% over the next year or so. This would equate to a saving of £44.79 a month (or £537.48 a year) on a £150,000 mortgage.* But mortgage lenders may not pass on these cuts in full to customers on their standard variable rate (or on discounted deals linked to this rate). So, if you're looking for a variable deal, a tracker mortgage makes more sense as it will ensure that your lender has to pass on any rate cut. 3. Keep Control Of Your Credit Introductory offers on credit cards are still pretty good, with many offering a 0% interest rate on balance transfers for 12 months and several offering 0% interest on new purchases for a year. But are you still eligible to take advantage of the most attractive credit card deals? The credit card business is far less profitable than it used to be and there has been anecdotal evidence the proportion of rejected applications is rising although this has been denied by some in the industry. Banks are focusing on what they perceive to be high risk customers and reducing their credit limits. To claw back profits, fees are rising for foreign transactions and cash withdrawals. We're yet to see widespread annual fees or rises in standard credit card interest rates increase, but it's possible that this might happen. The good news is that there isn't much evidence that our credit card spending is spiralling out of control. The total amount we owe on credit cards has remained broadly unchanged at £65 billion since the summer of 2005. The bad news is that we're still spending more, and putting it on our debit cards instead! 4. Protect Your Income It's always makes sense to plan for the proverbial rainy day. If you have dependents, then make sure your life insurance arrangements are up to date. With the credit crunch beginning to bite and growth in the economy starting to slow, protection from accident, sickness and, in particular, redundancy may be more of a priority now. Protecting your income, rather than just your mortgage or a personal loan, will provide you with peace of mind. But read the small print carefully to make sure you know what you are covered for and what exclusions apply. 5. Boost your savings Although the Financial Services Compensation Scheme has been boosted in the wake of the events at Northern Rock, it still offers scant protection for those with savings over £35,000. So consider splitting up your savings into separate accounts if you have more than this amount with one bank. Finally, although interest rates expected to fall, fixed-rate savings accounts currently offer a higher interest rate than the most competitive easy access accounts. This unusual state of affairs has arisen because banks are eager for cash at the moment. So if you have money to spare, tucking it away for a year or two could be more profitable than usual. *If the mortgage rate fell from 5.75% to 5.25%. More: Why The Credit Crunch Is Good News For First-Time Buyers