Five Ways To Beat The Credit Crunch
As stock markets and house prices lurch downwards, we suggest some simple steps to strengthen your finances.
I'm writing this article during a day that has already been christened `Meltdown Monday' or `Black Monday'. News of the bankruptcy of Lehman Brothers, the fourth-largest investment bank in the US, has sent stock markets tumbling across the world. Also across the Atlantic, fellow `bulge bracket' bank Merrill Lynch has been bailed out by Bank of America while America's largest insurance company, AIG, has requested $40 billion of emergency funding from the US Federal Reserve.
To be blunt, today has been a brutal `bonfire of the banks'. As I write, the share price of HBOS, the UK's biggest mortgage lender, has crashed by almost three-eighths (37%) with other British banks' shares down between 4% and 16%. Blimey!
From Wall Street to our high streets
Even if you own no stake in the financial firms floored by today's news, you could still lose out in future. That's because plunging asset prices have wiped out tens of billions of the banks' spare capital, leaving them unable or unwilling to lend to any but the most credit-worthy individuals and firms. Hence, as banks reduce their leverage (borrowing heavily in order to make greater but riskier returns), I expect the credit crunch to worsen in the weeks and months to come.
This will cause two immediate problems for hard-pressed borrowers. First, the cost of credit will rise: we've already had interest-rate rises on credit cards, mortgages, personal loans and overdrafts. Second, the availability of credit will fall further, making it difficult to borrow more or refinance existing borrowings.
It's time to turn the tanker around...
It's quite clear that the next leg of the credit crunch -- fuelled by missed payments and bad debts -- will be downwards. Hence, even if you have already taken some steps towards improving your financial health, it makes good sense to batten down the hatches in case the hurricane strikes. Here are five simple ways to improve your household finances, starting today:
1. Be better at budgeting
The people most at risk during downturns are those who, knowingly or unwittingly, live well beyond their means. Of course, constantly spending more than you earn is a recipe for financial ruin. However, in recent years, raised consumer confidence (bolstered by seemingly ever-rising house prices) has masked Britain's spendthrift ways. Thus, it's vital to build a strong foundation to your personal finances by learning how to budget.
2. Massage your mortgage
With over 11.8 million mortgages in the UK, close to half of all UK households have a hefty debt to service every month. Indeed, the interest alone on our £1,218 billion of home loans exceeds £6 billion a month.
Of course, as with all debts, the secret to a happy home loan is to minimise how much you pay in interest and fees. By remortgaging, you can try to trim your monthly repayments down to size, so give our award-winning, no-fee mortgage service a try.
3. Bash your borrowing
On top of mortgages, we've also built up an impressive £231 billion in non-mortgage debt, such as credit and store cards, car and personal loans, and overdrafts.
To avoid paying excessive rates of interest and sky-high fines for unauthorised borrowing, it makes sense to tidy up your existing borrowing. For example, by transferring your card debts to a credit card offering 0% balance transfers, you can freeze interest until as far ahead as January 2010.
4. Prune your premiums
Another good habit to adopt is to avoid automatically renewing your insurance policies. In other words, when your yearly renewal notice arrives, don't just lazily accept your insurer's latest premium hike. Instead, shop around in order to find quality quotes for car, home, life and travel insurance. Your aim is to get the same or better cover for less cash and, thanks to the wonders of the Web, this is quicker and easier than it's ever been.
5. Strengthen your savings
Once you've knocked your finances into reasonable shape, put some effort into boosting your savings. By earning more interest and avoiding tax on it, you can raise the returns from your spare cash. To get started, read Top Savings Accounts For £25 and £25,000 and Don't Get Caught In This Savings Trap.
Lastly, by getting to grips with your day-to-day finances, you can limit the impact of any economic slump and, therefore, reduce your risk of ruin. What's more, it should help you to sleep easier at night!
More: Save money with cheaper gas and electricity tariffs | Why It Pays To Be A Tart | When Debt Turns To Despair
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Houses are overpriced at the moment, I believe by a factor of 2 to 3. Until this is rectified, we have all built our houses on the sand, and the storms will come. [br/]more strife for banks and homeowners.
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Blaming the Government on this is ridiculous and a little disengenious: people and businesses have to face the consequences of their financial decisions in order to understand that THERE ARE CONSEQUENCES. I work in consumer credit and to be honest the people I am dealing with will max out one card and then start on another. You can't stop them as they feel 'entitled' to run round shops indulging themselves, until the time comes where their payments are hurting them so much that they are using the cards to pay for their food shopping, petrol and bills. Now the attitude appears crazy, but when the property prices were rising by the month we could all absolve our consciences by telling ourselves that one day we could sell our houses, pay off our cards and relax in the sunshine. Where I see secured lending I am often seeing defaulted payments: where is the fun in paying your debts?This is consumer naivety. That said, I have low balances on my cards, and am now receiving monthly limit increases and letters offering me financial rewards for using my cards. Perhaps this consumer naivety has been fostered and encouraged by the banks (though, again, would we really be happy if the Government took a hard line on this and started interfering?). We can all learn something in the coming slowdown, but something tells me that the majority of people (and businesses) will choose not to. Just look at the paper millionaries of the 80's who became the bankrupt litigants of the 90's. I think we have been warned by history more than a few times.
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.....erm, what happens when we have followed all the above tips, lived within our means, shopped around for competitively priced financial products, etc, only for American banks to recklessly lend money to people who haven`t got a hope in hell`s chance of repaying it, meaning the banks charge us mugs higher interest and the like to recoup their self-inflicted losses???!
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20 September 2008