|PIC1|What is the 'credit crunch'?

The term 'credit crunch' means that there is a lack of money available to borrow in the economic system, which in turn means that the cost of borrowing money rises.

When banks lend money to customers, they get this money both from other customers' savings and from the money market. Banks also borrow money in order to grow their own businesses, but can overstretch themselves by borrowing too much in order to speed up growth, as happened in the well-publicised case of Northern Rock. Risky borrowing - when the ability to repay money in is doubt - is a dangerous business.

Risky lending is problematic too. When a large number of people in the USA failed to repay their mortgages in 2007, a number of American banks lost money as a result, because they were relying on income that never appeared. This meant that there was less money in the market to go around, and banks as far afield as the UK didn't have as much cash available to lend to their customers.

What effect will this have on me?

The lack of funds available to banks means that they are increasingly careful about lending money to customers. This means that the terms in which they lend money are more restricted, and the amount of money they are prepared to lend has reduced. The number of 100% mortgages has dropped considerably, for example.

The cost of borrowing has also risen, with increased interest rates and fewer deals and discounted rates available. Customers in what the banks call the 'sub-prime' category (mainly people with a poor credit history, such as those who have missed repayments on previous loans) may find it particularly difficult to borrow at present.

What does the Bible say about credit?

The Bible has a lot to say about money, and Jesus was particularly vocal on the subject. His observation that 'No one can serve two masters ...You cannot serve both God and Money' (Matthew 6:24, NIV) is quite clear about ensuring our priorities are in order and thoughts of acquisitions are well down the scale. Paul is equally blunt in his letter to the Romans: 'Don't run up debts... don't always be wanting what you don't have' (Romans 13:8-9, The Message).

How should I respond?

How does this translate into practical, realistic advice today? Simply put, it means that if you do borrow, borrow cautiously. Don't take risks with your financial security - particularly if you have a family to support. And ensure that you repay the debt promptly, so that your reputation (and credit score) are not damaged by poor financial arrangements.

Just as the banks who relied too heavily on the availability of money in the markets found themselves in trouble, individuals who have a risky approach to their finances can also come unstuck if the source of their cash dries up.

It is crucial to examine your finances often, look closely at your financial commitments and budget carefully. If it is necessary to borrow money, you should be sure that you are able to meet the cost of repayments, allowing for interest rate rises and not relying on uncertain sources of income. An unexpected redundancy or change in family situation, can place a major strain on your financial resources, so it is wise to ensure that unrealistic loan repayments don't add to the pressure in such circumstances.

If you're new to putting your bank account under the spotlight, I recommend John Preston's book The Money Revolution (Authentic Media, £3.50), and the website www.themoneyrevolution.net, where you can download free spreadsheets to make the task of examining you finances much easier. If you have debt problems, however, speak to Christians Against Poverty (see www.capuk.org or call 01274 760720) or the Consumer Credit Counselling Service (www.cccs.co.uk or 0800 138 1111). They offer friendly, practical help.