If you watch the news in Britain or look at a British newspaper at the moment, a term you are more than likely to come across is 'credit crunch¹'. It has become a bit of a buzzword, but what does it mean?

Well, it's a financial term and it means that people in Britain are feeling the pinch right now. A credit crunch means banks have a shortage of money to loan people, which in turn has an effect on many other things. It's the effect this shortage of money has which is called the credit crunch.

The beginnings of this problem can be traced back to America, where people with a poor credit history were allowed to take out mortgages, which they were unable to repay.

Banks often lend money to and borrow money from each other, something we might not have realised they actually do. It was certainly cheaper for banks in America to get money this way, than to borrow money from America's Federal Reserve, their central bank.

A lot of these loans that people were unable to pay back were sold on to other banks, many of them in the UK.

As banks did not know the level of debt they were acquiring, they no longer wanted to lend money to or borrow money from other banks. There is now less movement of money between banks and therefore a shortage of available money.

Banks and other financial institutions have to compensate² for this by increasing fees and rates on products such as mortgages, loans and credit cards. Consequently, the average man on the street is affected³ as it is harder for them to borrow money with these increased rates.

Britons are also affected because the cost of living continues to rise; food, petrol and utility bills are all on the up and that means they have less money to spend on a day-to-day basis too.

So many Britons are seeking advice on how to tighten⁴ their belts, as it looks like the credit crunch may be around for some time.