The credit crunch has been a huge blow to the UK financial markets, but if you have watched the news or read in the newspaper about the credit crunch, you would have heard it can be traced back to America a year ago.

In 2006 and 2007 America began to allow those with bad credit ratings to take out mortgages, they were known as sub prime mortgages. Many of those taking on this commitment later fell into financial problems, resulting in failed repayments.

This was at a time when house prices dropped and interest rates jumped this lead to a whopping increase in repossessions.

At the same time as this took place many providers instead of borrowing through America’s central bank the Federal Reserve were buying from each other.  They did this as it appeared more cost effective.

Those bad accounts where people had failed to pay were now in the hands of other providers, banks were unaware how much bad mortgage business they were buying into.

As banks wised up to this they stopped borrowing and lending to each other causing the start of the credit crunch.