Understanding What the Credit Crunch Means for Key Groups

Newspapers and magazines have been filled with images of the Great Depression for two weeks as the stock market has rocketed up and down. Many Americans are now wondering exactly what is a good credit score. Some are looking at 401k accounts that have dropped 45% or more seemingly overnight. In order to actually remember the Great Depression, however, a person would need to be 79 years or older. That stock market crash happened in 1929. The images of shanty towns and bread lines are terrifying even today, but are they realistic? What does the current situation mean for younger Americans, especially students, minimum wage workers, and small business owners? How will the credit crunch affect their lives and livelihoods? what is a good credit score

For students, many of whom have never been forced to make a difficult choice in their lives, some hard realities are in the wind including:

• Shrinking college funds at just the time the money is needed. This translates to a greater need for financial aid and grants, sharp curtailment of out-of-state educational choices, and the potential need to work during their university years.
• Tighter requirements for student loan and grant applications, especially those from private lenders. Additionally, with more students needing this money, there will be less of it to go around.
• Setting up a different time table. Completing a college degree could take longer for students who must work and who can therefore not take a full class load.
• More uncertainty in the future. Depending on the state of the economy at the time, graduating students may not be able to find a job, especially if they chose to major in a field that is overly saturated with workers.

There is also the real factor that if these students require more financial aid and grant money, they are going to enter their working lives already saddled with a heavy debt burden that may keep them from taking other major steps in their young adult lives like marrying or acquiring a first home.

These college students will be getting an early taste of what the minimum-wage American worker has been experiencing for years. At the end of July 2008, the minimum wage in the U.S. went from $5.85 to $6.55, an increase of 12 percent. That still means, however, that a full-time minimum wage earner makes only $13,624 a year. The poverty line for a family of three is $17,170 a year.

These are people who depend on credit for the major purchases in their lives. They are used to having to pay off cars and appliances, but they are also the first sector of the economy to be hardest hit by a factor like $4 a gallon gasoline. Do they feed their kids or buy gas to get to work?

For people already living paycheck to paycheck, an inability to get credit means deferring any major purchases, which in turn affects the broader economy as it depresses the state of retail sales. Those figures dropped 1.2 percent in September, the third declining retail month in a row, and the largest drop since August 2005. That’s a sure sign that the American consumer is feeling unprecedented financial pressure.

That pressure, in turn, affects the small businessman who will see a commensurate drop in profits that will change his ability to:

• buy and maintain inventory.
• improve and maintain equipment.
• hire workers and provide benefits to them.
• maintain his present workforce.

In a financial situation like the one currently being faced by Americans, discretionary spending is the first thing to go. Any business that can be defined as a luxury, for instance hiring someone to cut the lawn or clean the pool, will feel the crunch first. With limited lines of credit to weather the storm, many of these businesses will go under.

When the nightly news talks about the new scarcity of the auto lease agreement or warns of the rising number of home foreclosures, it’s easy to imagine those things being a problem for someone else. When you have to tell your child he can’t go to the school of his choice? When you find yourself walking to work because you can’t afford gas? When you have to let your workers go? That’s when the credit crunch gets personal and close to home. Will it happen? It is happening. Will it get worse? That is more difficult to answer, but most analysts agree there is no quick fix for the current situation and people should expect little improvement until some time in 2009 at the earliest.

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