Definition of Credit Crunch

What is a "credit crunch"? What is the definition of the term "credit crunch"?

A "credit crunch" occurs when credit is harder to come by. When credit is harder to come by (or "tighter"), then the cost of borrowing will increase.

Three or four years ago, credit was very easy to obtain. Corporations were easily able to obtain credit, and individual borrowers were easily able to obtain credit.

The "Great Recession" then hit, and credit markets suddenly seized up. Banks were suddenly afraid to lend to individuals, individuals and banks were afraid to lend to corporations, and banks were even wary of lending money to other banks, even on a short-term basis.

The reason for this fear? The increased probability of a default on the other side. Suddenly there are more rigid requirements to receive credit, and those who don't meet these requirements are forced to pay even more to borrow. In many cases the higher borrowing costs are just too exorbitant, and many companies are forced to delay plans for growth or look for the funds elsewhere.

The "Great Recession" is a perfect example of a "credit crunch", and this will likely end up being one of the worst "credit crunches" in many generations.


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