How investment banks collapsing affects your credit.

By now you have probably noticed the wheels are coming off the financial system and investment banks are dropping like flies. The credit collapse has claimed financial monsters such as Lehman Brothers, Merrill Lynch, Bear Stearns and others are in trouble also.

Why are they failing?

All of these institutions have one thing in common… they all are heavily invested in securities linked to the sub-prime mortgage market.

Prior to the mortgage market collapse, Wall Street was eager to buy subprime loans and package them into complex securities and sell them to investors. As long as housing prices continued to soar, everything was fine. But once the housing market began to decline, borrowers began to default on mortgages and that started the domino effect.

As these mortgages defaulted it caused the complex securities (that Wall Street created from those mortgages) to crumble. With these investments now considered high risk, it was inevitable that these financial institution stocks would take a major hit. As a result, some of these institutions have seen the price of their stocks plummet upwards of 90%.

How does this affect your credit?

These financial institutions are investment banks, so people don’t have savings accounts, mortgages or pensions in their names. But indirectly, much of the money that works its way into your pocket book as loans are generated from these institutions. As they fail, it could drastically limit sub-prime loans made to the public.

The collapse of these investment banks stirs uncertainty on Wall Street. As Wall Street remains rattled, it could limit the amount of money available to lend to consumers.

Wall Street is already skittish about sub-prime mortgage loans, but this is working its way into all other types of sub-prime loans as well (auto, personal, credit cards, etc…). So if your credit profile is less than good or excellent, then your ability to borrow would be greatly reduced.

Many subprime lenders have tightened the purse strings, because the availability of money for them to lend has dried up.

What do you need to do?

Now it’s more important than ever to improve your credit. The sub-prime lending market is drying up and you need to improve your credit to maintain your borrowing power. You must be proactive! This means you should concentrate on two aspects 1) repairing your credit report and 2) building positive trade lines to increase your credit score.