How to Financially Prepare to Survive a Credit Crunch

How to Financially Prepare to Survive a Credit Crunch

Debt has led us not only to debt management plans but also made us face numerous financial troubles and downturns sometimes in the form of bankruptcy, foreclosure and sometimes in the form of credit crunch. After the mortgage meltdown in mid-2007, lenders cracked down on home equity loans, causing consumers to turn credit cards as a lending source which resulted into increased credit card debt and delinquencies. Eventually, credit card companies, feeling the brunt of delinquencies, began cracking down on credit, increasing interest rates and credit card fees, and decreasing credit limits. A credit crunch is a period of time in which credit and loans are more difficult and costly to obtain. Credit crunch is not only a damaging time for consumers but it is also a trying time for those individuals and companies who invest in debt and subsequently face loss when consumers fail to pay back their debt or to lend from creditors. When credit card and loan delinquencies rise, debt investments become unattractive, leading investors to pull their funding. As a result, banks become stricter with lending and consumers, especially those with credit problems, find it harder to get credit. But there definitely are ways to survive a credit crunch.

Timely and regular payment of your credit card bills and loans is a way which can save card holders from increased late fees and heightened interest rates which becomes the only way for the credit card companies to find ways in order to compensate their financial loss as investors start pulling out funds in market. Because of universal default, your interest rate on a particular credit card could increase even if you're late on another credit card's payment. Not only do timely payments save you money and keep you out of collections, it also keeps your credit score healthy. A good credit score indicates a trustworthy borrower - one that credit card companies aren't afraid to give credit to and this in turn wards off some of the negative effects of credit crunch. Many times even banks start sending accounts to collections sooner, if credit card delinquencies rise at a swift rate. It is advisable to keep your credit balance as low as possible as the credit card companies may decrease your credit limit in order to tighten credit; however other occasions which may provoke them to decrease your credit limit are repeated extension of credit limit, missed payments and so on. But In a credit crunch, credit card issuers will decrease your credit limit simply because of market conditions. Thus, keeping a low balance will reduce the damage of a lowered credit limit. A zero balance will eliminate the damage all together. During a credit crunch, the role of emergency fund becomes more important as an emergency fund keeps you from having to resort to credit during an emergency.

Consumers can reduce the effects of a credit crunch by taking steps to improve their credit. Making timely payments on all bills, keeping credit card balances low, and limiting new applications for credit are all ways you can improve your credit. To conclude it all, good credit goes a long way during a credit crunch. If you have good credit, keep it that way. Charge only what you can afford and pay your balance in full each month.

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