Making the Best of the Credit Crunch

The credit crunch has had a noticeable and sometimes frustrating effect for anyone who is trying to get a mortgage, applying for a personal loan, or carrying a substantial unpaid credit or store card balance from month to month. The cost of borrowing of almost all types has increased. This fact combined with the increase in the price of fuel and basic foods has decreased the buying power of every pound a person brings home. People at all income and economic levels are feeling money pressures in so many different areas of their lives that it's hard to find that relaxed mental space that allows one to pause, take a deep breathe and develop practical solutions.

27 May 2008

If you are feeling anxious, one of the first steps is to get what I call the "miasma of numbers" or "haze of numbers" out of your head and on to paper or a computer screen. The simple process for writing down what you are carrying around in your head - and in your stomach and chest as anxiety will help you begin to develop some objectivity about the reality of the numbers. In some cases it may not be as bad as you felt it was, while in other cases it may indeed be worse. Either way, at least you've taken the first step in the process of creating a corrective plan. You've put the numbers and the problems on paper and they are now in front of you, instead of inside you, in stark black and white.

Divide your expenditures into two groups: essential and discretionary. Be careful that you don't include any discretionary spending in the essential category because you've let your sense of entitlement sway you. Now start to look at what discretionary spending you can eliminate: fewer takeaway meals or dining at restaurants, not so many gifts for the children, delay buying new clothing or a new car, to name a few. Remember: your emotional goal is to stay focused on the relief you will feel by lightening some of the money pressures in your life. Do not let yourself feel deprived because you've decided not to spend money in some ways. This is a new economic environment and we must all make adjustments in the ways we allocate our funds.

Next you need to evaluate your essential spending to see how you can reduce it. From personal experience I can tell you there are always ways to save a little money in this area - especially when saving a little money will make a difference between a bill being paid or going unpaid. Here are a few tips: buy certain household products only when they are on special offer, use manufacturers' coupons to get discounts on items you use regularly, plan your shopping trips so you drive less and therefore use less petrol, cook large economical meals that can be frozen and reheated, change your diet so you can take advantage of special offers on seasonal produce. Your emotional goal is to get in touch your creativity and enjoy the process of stretching the buying power of your money.

I will admit that many of the changes will result in small savings. Keep in mind, however, that together all of these small amounts can add up to a good sum of not only real money, but also relief from money pressures, a better night's sleep, and a little pride in oneself for having made the money you bring home work smarter and go further.

If you are looking at buying property during this current credit crunch or are thinking about re-mortgaging - especially if you're planning to take on extra borrowing - you may find that the requirements for getting a mortgage have tightened. It is important for you to not only have a clear, objective understanding of your financial situation before applying for any loan, especially one as important as a mortgage, it is equally important for you to be proactive in helping increase the likelihood that you will be approved for the mortgage you want.

Before applying, look at the different deals or types of mortgages on offer and find out the bank's requirements for the loan or mortgage with a good interest rate. Make sure you check your credit report before you file your application. Many people complain about having to pay the £2 it costs to get the report, but it is better to know if there are any "black marks" beforehand rather than find out about them after you've been turned down for the mortgage. If there is any negative information reported by your creditors that is factually wrong, correct it before you apply for your mortgage. If the report shows a history of late payments on credit cards or personal loans, you may want to delay applying for the loan until you've made enough on-time payments to show a better report. And if you've missed payments, but your situation has since changed (perhaps because you've got a better paying job), you can add an explanation of why you had problems with your debt.

Let's be honest with ourselves. Banks and building societies are less likely to take a risk with someone who has a less than stellar credit rating or whose income may not quite be sufficient to support the mortgage repayments and other debt he or she may have. Add to this the fact that property prices are no longer increasing the way they have in the past, and you can easily understand why it's a good idea for you to help yourself by being pro-active, especially before you submit your mortgage or loan application.

If you are carrying a substantial amount of credit or store card debt, it is crucial that you be responsible and prudent during the credit crunch. Those tired-and-tested rules will serve you and your credit rating best during this time. First, avoid spending more than you can afford to payoff each month. And second, if you do have to carry a credit card balance, set a fixed amount of time by which you will have it paid off and remain disciplined in accomplishing your goal. It's better to pay off your store cards and credit cards, even it requires a short period of significant sacrifice, rather than use the money you earn in these tight times to pay interest and other charges.

Money in savings is your best financial friend during this credit crunch. With the feeling of uncertainty in the investment markets and the business climate, this is a good time to make sure you have a sufficient cash cushion in the bank to provide you with a safety net. During the last few years when I would suggest this, people would often say that the equity in their property was their savings account. These people either confused the words "equity" and "cash" or conveniently made the distinction a bit fuzzy. During a credit crunch, where housing market growth is limited or even declining, people may find their equity being reduced and may therefore see their supposed "cash" safety net shrink.

During times when returns from investments in property or the stock market are high, people often overlook the importance of cash as an asset class. Indeed, it is true that cash may not be earning a great return in the bank or building society account, but it is safe. Not every pound you save or invest can look to earn the highest return. Diversification does not only mean having money in property, shares, bonds, commodities, as a part of your portfolio, it also means having your money invested in assets with different risk profiles. Perhaps one of the benefits of the credit crunch is that it will remind all of us of the importance of cash as an asset, but also of the importance of saving it.