Pennywise
Credit Squeeze
by: Sahil | last updated: November 13, 2009
Category: Standard Credit Cards | Tags: Credit squeeze, credit crunch, financial crisis, credit crisis, crisis
Category: Standard Credit Cards | Tags: Credit squeeze, credit crunch, financial crisis, credit crisis, crisis
A credit squeeze is a term in economics where two factors occur at the same time to stifle the supply of credit. Usually during credit squeeze interest rates shoot up and people with a marginal line of credit tend to be deprived of any opportunity for acquiring the same. A credit squeeze is also called a financial crunch, a credit crunch, or a credit crisis in which the availability of credit becomes dearer.
There are many reasons for the occurrence of a credit squeeze and one of them is the lowering of the value of collateral that is made against the loan. The reduction in the price of collateral such as houses or cars can mean higher amount of risk for lenders. Therefore the lenders respond by increasing the interest rates on various lines of credit.
A credit squeeze can also be the result of litigation or laws that are passed regarding credit related transactions and products. For example, the Credit Card Act of 2009 that takes effect in 2010 has made many credit card issuers and banks change their interest rates and other fees as a damage control strategy before the litigation takes effect.
In the event of a credit crunch many small businesses find themselves unable to stay afloat in the market. Many liquidate the business before the rising interest rates take their toll any further on the strained and drained funds of a company. This can be especially true for newcomers in the market who have shorter credit histories and fewer lines of credit.
Credit crunches and squeeze can also be the result of sub-prime lending practices which lead to foreclosures or written off debts. The Clinton administration is sometimes blamed for passing laws that made sub-prime lending easier. This led to many foreclosures and coupled with a housing sector collapse caused a credit crunch that accompanied the recession.
It is imperative to make a distinction between a credit squeeze and a credit crunch. With the squeeze, consumers who are capable of meeting the tighter requirements for acquiring a line of credit will qualify for loans and other forms of credit. In a credit crunch, right to use new credit is so restricted that nearly nobody meets the requirements at even the maximum of interest rates.
When employed as an instrument to hold back a rate of growth in the economy that is deemed unsafe, a provisional credit squeeze can be helpful. However in situations where the squeeze is not supervised narrowly, the practice of restrictive credit practices can mean a money supply tightening. When this occurs, the economy will decelerate at a rate that is unhealthy.
The outcome of this state might include ruthless drops in the value of securities, failure of businesses, and a national recession that will necessitate an extensive amount of time before recuperation is accomplished.
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