What is bad credit? What's it got to do

with the credit crunch?

 

We all know what the credit crunch has meant for us personally. The prices of basic items such as bread have increased dramatically. The cost of fuel has risen and fluctuated dramatically and the Bank of England has even tried to control matters by significantly reducing the base rate. That's just one of their many attempts to prevent a recession.

Reports show that a recession, however, is on the way and that means more job losses, lower salaries, more uncontrollable fuel prices, and millions of people facing serious hardship. We can already see it in the US where realtors (estate agents) and other professionals are losing their jobs and having to rely on charitable organisations to care for their families. However, the US hasn't yet declared that they are in a recession.

It could be cultural. After all, Japan and many European countries have!

Bad Credit

Isn't all credit bad? The simple answer is no. Bad credit is when people borrow money that far excels their means. It is money, which they cannot pay back. We have credit scoring so that lenders can see whom they should and shouldn't lend money. It might make you sad to be turned down for a loan, but in most cases it's to stop you from getting into more debt than you can afford to pay back.

People who manage to take out more credit than they can pay back and then use that debt to live are in 'bad debt'. Good debt on the other hand, is the sort that has a date by which it will be paid off. Someone who has savings but doesn't want to dip into them might take out a 'good debt' loan. Equally, someone who receives guaranteed bonuses might take out a Payday Loan to spend a small portion of those bonuses early.

Sub-prime markets

In recent years a certain type of loan became very popular in the US. This loan was called the self-declaring or no documentation loan and because people could say they earned any amount they fancied, they were nicknamed 'liar loans'. This kind of Loan was intended for people who were self- employed. However, anyone could get them and in they did, in their millions, borrowing way beyond their means, with no chance of ever paying their debts back.

This meant that US banks had given money to people who couldn't pay them back, they had lost money. They had been guilty of 'irresponsible' lending, but it was on the biggest scale imaginable. At the beginning of the credit crunch people who were unable to pay off their mortgages due to taking out too much credit, began to lose their homes. These days many people have lost far more and as we head in to recession, it's thought that things will get worse before they get better.