James Daley: The credit crunch is starting to bite

The crisis in the credit markets has finally begun to take a true grip on consumers over the past month – as the cost of borrowing has risen, credit has got harder to come by, and – this week – stock markets have started to plummet as well.

While many commentators have been doom-mongering ever since Northern Rock first ran into trouble in September, the reality was not so bad for most consumers at first.

During the last few months of 2007, several lenders were still offering 100 per cent mortgages at competitive rates, unsecured credit was still readily accessible for the vast majority of borrowers, and stock markets – although slowly declining – were relatively stable.

During the last few weeks, however, things have taken a turn for the worse, with even the largest lenders – who at first thought they might be able to profit from the vulnerability of their smaller competitors – forced to take a step back. This week, for example, Abbey (owned by Europe's largest bank, Santander) raised the rate on its 100 per cent tracker mortgage by a massive 17 per cent, from 6.84 to 7.99 per cent, sending out the message loud and clear: if you don't have a deposit, we don't want your custom. Elsewhere, Nationwide and Alliance & Leicester also raised the price of their tracker mortgages, even though the last movement in the Bank of England base rate was downwards.

Meanwhile, credit card providers have begun to rein in their lending too. Two weeks ago, I received a letter from American Express informing me that they were cutting my credit card limit from £7,400 to £800 – an 89 per cent reduction – and would no longer be allowing me to withdraw money from my card at cash machines. Worse still, the changes came into force just four days after the letter was sent.

If I'd been a bad customer who had never paid their bills on time, or even one that never used my card, then I might have understood their decision. But neither of these were true. Amex, like many other credit card companies, has been reducing the limits of large swathes of its customers, to save itself from having to carry such big reserves on its balance sheet at a time when capital is hard to come by. The fact that these reductions were imposed within a week in some cases, demonstrates the urgency of the situation.

The final kick in the teeth for consumers over the past few days has been the slump in the stock markets, which has created yet more anxiety for savers over the safety of their investments. Only four years on from the end of the last brutal bear market, some investors have only recently built up the courage to put their money back into stocks and shares. The volatility of the last week will have done little for their nerves.

In the meantime, others who feared losing their money in equities again, and piled into commercial property instead, are also getting a hard time of things (see opposite).

Although you'll hear the same cry every time there's a market crisis – it's worth listening to the experts this time when they say "This time is different". While the markets are volatile, the British, European and US markets are still relatively cheap compared to historic valuations, and the best way to make the most of such choppy conditions is to keep making monthly contributions into an equity savings plan. If you are saving for the long-term, the daily ups and downs of the markets should be an irrelevance. And if you're saving for the short-term, you shouldn't have your money in shares in the first place.

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