In the News
AIG, Lehman, Fannie … Oh My: What Does the Credit Crunch Mean for You?
Big banks falling left and right; here’s what it boils down to
Fannie, Freddie, Lehman, Merrill. Now AIG, and tomorrow maybe WaMu.
What are we talking about here? Is this your crazy extended family that has crazy extended-family nicknames for everyone? Is Uncle Tuffy going to pop out of the corner with his cannon cigar lighter at any moment?
You probably wish that this were all about Uncle Tuffy right now. It’s not, though, and there are lots of questions floating around about the future of our economy – and in particular, these rock-solid institutions that we thought were fortresses built to house our money, our retirements, our futures.
The fall of the big banking firms seems monumental – and in many ways, it is. Most people today have never witnessed the collapse of such institutions, nor have they been the ones to bail out the faltering businesses (What? You thought the government was footing the bill for AIG? Oh no, it’s taxpayers all the way, baby.)
But what does this really mean for you? What is the absolute bottom line on how this will affect the day-to-day of your life?
Honestly, not much is going to change. And that’s a good thing, as Martha would say.
The biggest change might be in the credit market. You will still be able to get credit cards, loans and mortgages – but the lender may require you to have a slightly more impressive credit score than in the past.
The giants who have fallen in recent months fell because they invested in high-risk loans – they gave money to people who they knew might never pay the money back. They hedged their bets, and it bit them in the butt. So this time around, they’ll be a little more careful, and make sure they are loaning to people who can really pay it back.
And remember, there are still hundreds, if not thousands, of banks that never invested in risky loans, and they are, and will remain, unaffected by what is currently happening in the big banks.
There is even a hidden bonus in all this mess: You may actually get a lower interest rate on your loan because the Federal Reserve is cutting rates in an effort to stabilize the economy!
If you have a 401k, you may see some fluctuations there, as the stock markets struggle to stabilize. Even those changes are minimal however, because most 401ks are so diverse, that the failure of one segment of the market does not mean failure for your investments overall.
The bottom line is that you won’t be affected much at all. But there are a few things you can do to further insulate yourself from any potential fallout:
• Review your credit score. Make sure you know what your score is, settle old debts and get that baby cleaned up! Look for ways to improve it, make it sparkle and shine – and you’ll find that you can get the loans you need at fairly good interest rates.
• Leave your 401k alone. I know, when you see money draining from your accounts, it’s so tempting to just put it all in a coffee can under the mattress. But that’s uncomfortable, and not very practical. Stocks, including your 401k, are meant to be long-term investments, which means that they will weather ups and downs. Even as the stock market is falling now, you can be sure that in a year or two it will be climbing again – and that’s when you’ll be glad you left your money alone.
• Make sure your bank is FDIC secured, and be certain that each of your accounts at any given bank has no more than $100,000 in it – this is the limit per account insured by the FDIC.