A credit crunch, credit crisis, or credit squeeze occurs when the general availability of credit declines considerably. We also use the term when it suddenly becomes more difficult to get a bank loan.
The decline in the availability of credit occurs regardless of interest rates. In other words, the availability of credit falls whether interest rates rise or stay the same.
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Banks and other creditors become reluctant to lend money during a credit crunch. Both individuals and companies notice the change.
Banks become reluctant to lend because of the greater risk of defaults. This is due to either political problems or adverse economic conditions.
During a credit crunch, lenders become much more selective about who they lend to. Their focus shifts to quality rather than quantity.
When this occurs, lower-income and middle-class individuals lose out. Small-to-medium size companies also suffer. Ironically, during a credit crunch, those that continue finding it easy to borrow don’t need loans