Will The Credit Crunch Affect My Savings

The credit crunch has seen global financial institutions stop lending to each other - and hence, increasingly stop lending to customers, as they seek to reduce their exposure to bad debt and defaults, and work to increase their deposits and balance sheets.

For customers, this brings about real problems, as mortgages, credit cards and loans are becoming increasingly hard to come by at favourable rates (if at all!) and living costs are rising quickly.

For savers there is a different kind of problem - inflation. The Bank of England has been struggling to manage inflation rates for the current year, which have increased to around 4% (although for many people, personal inflation may be far higher - there are various different ways of calculating it.)

Inflation causes prices to rise - and savings to become eroded. Many people have their savings in accounts actually earning less than inflation - which means that their nest eggs are being eroded away. There is some light at the end of the tunnel for savers, however - as banks are very keen to increase their deposits base, they are actively encouraging customers to deposit savings with them, and have some competitive products on offer.

To keep savings safe in the credit crunch, customers need to take action and review their personal portfolio. Firstly it's worth making full use of a cash ISA (the limit was increased this year) as these savings are exempt from tax. Make sure you also have your cash ISA with a competitive product - the best are currently on offer at around 6% interest, which beats inflation! Make sure, however, that if you are looking to transfer an ISA to a more competitive account, that you do it in the right way! If you simply withdraw your money, you'll lose the tax free savings status for that current year. Instead you will need to complete an ISA transfer form and the banks will organise it between them. It may take a few weeks, but your interest shouldn't be unfavourably impacted. (It's well worth reviewing the t's and c's for small print around transfers, for ex example, whether there's an advance notice period for withdrawals - which you'll need to adhere to, or risk losing interest income.)

When you've filled your ISA, try using internet or newspaper 'best buy' tables to identify the most competitive savings accounts - again, some are currently advertising interest rates of around 7% as the banks vie for savings business. As ever, read the small print and the terms and conditions - many of the rates are locked in and have penalties if money is withdrawn before any notice period.

As with all financial decisions, it's best to consult an independent financial advisor (IFA) or advisory institution for advice. They will have the skills and experience you need for selecting the right account for you, and will help you avoid making costly mistakes, and find the best solution for you to keep those savings safe from the effects of the credit crunch! So don't bury your head in the sand - banks rely on you doing so for their profit margins - take action now and keep your hard-earned savings working for you!