credit cards

Why Credit Cards Are Bad for the Economy

You’ve probably heard all the good reasons to use a credit card, but what if I told you that using credit cards is actually bad for the economy?  In this article, I explain why.

Economics

Economics can be defined as the social science that studies the production, distribution, and consumption of goods and services.  That seems like a fair definition, I think.

In economics, “supply and demand” is the relationship between the quantity of a commodity that producers wish to sell at various prices and the quantity that consumers wish to buy.  It is the main model of price determination used in economic theory (the price of a commodity is determined by the interaction of supply and demand in a particular market).  This simply means that as demand increases, price increases.

Think of any good or service out there.  If all the sudden, people started buying it all up, the price of that good or service would increase with the increased demand.  This obviously makes sense, and it’s a good way for businesses to set their prices.

If I’m a business owner who sells a service for x amount of dollars per hour, and I’m always overbooked, why not increase the price of the service? This might allow me to do less for more, so I can take a day or two off from work and probably make the same amount of money, if not more.  This might be exactly what I want to do if I find myself unable to keep up with the demand.

If increasing my price doesn’t decrease demand, why not do it? If for some reason demand starts to slip and business suffers because of it, I can always adjust my price to get the result that I’m looking for.  That’s one example of how supply and demand works in business.

Credit cards are another example of a supply and demand situation, but this is more negative, I think.  What happens with credit cards is that people can potentially buy whatever they want, almost irrespective of price, so they often do.  This is because they’re not using their money (at least not at first).

In the olden days, if you didn’t have the money to buy something, you just didn’t get it.  But with credit cards, that’s not necessarily the case anymore.  If you don’t have the money, you can buy it anyway.  If this happens a lot, as it often does, it causes prices to artificially increase because of artificial demand; this is basically inflation.

Inflation

Inflation is the increase in the prices of goods and services over time.  It basically means you have to spend more to buy the things you need (your cost of living)

Inflation reduces the purchasing power of your money, reducing the value of the dollar.  In other words, your money is worth less now, than it was in the past because of inflation.

As prices rise, your money buys less, reducing your standard of living.  So your cost of living increases.

The most common cause of inflation happens when there is an increase in demand.  When demand outpaces supply, you have inflation.  People want what they want so bad, they willingly pay higher prices for it.

Credit cards have a direct impact on this.  How many times have you used a credit card to buy something you wanted?  Perhaps you didn’t even need it, but since you wanted it, you conveniently charged it on a credit card.

People are basically buying whatever they want, and credit cards enable them to do that.  What we don’t think about, however, is how that behavior affects the economy overall, and it’s not good.  It basically causes inflation for no real reason, so the cost of things we do need is actually increased.

Debt is not good for the economy

The more debt you have, the less money you actually have to spend, which is not good for the economy.

Some might think that using credit cards stimulates the economy because you are making purchases, but this idea is simply confused.  This is not real money.  Sure, it might seem like it stimulates the economy at first, but eventually you have to start paying that money back.  And once you do, you have less real money to poor into the economy through purchases and investments.

If you tie up all of your income in debt payments, you have no money.  You can’t do anything with your money if it is tied up in payments.  However, when you pay off debt, or avoid debt better yet, you free up all kinds of money, usually.  You can now stimulate the economy with real money.

This especially becomes a problem when you reach the point where your payments are more than your income; now you’re bankrupt.  How is that good for the economy?  It’s obviously not at all!

If you file bankruptcy, you could argue that it’s good for you, but it’s not good at all for the economy.   Just because you no longer have to absorb the loss of your debt, doesn’t mean that someone else doesn’t have to, and that’s exactly what happens for the companies that own that debt.

If a company absorbs the loss from your bankruptcy, it’s no longer as profitable as it was.  This has a negative impact on the employees of that company:  their benefits, their pay, their jobs, ect.  It also has a negative impact on people who don’t even work for the company, like people who hold stock, have 401(k)s, or other mutual funds.  Your bankruptcy is still bad for the economy.

When you don’t have debt, there’s no risk of bankruptcy.  When there’s no risk of bankruptcy, there’s no risk of someone else absorbing a loss.  When no one has to absorb a loss, there is no adverse affect to the economy.  It’s really that simple.

The fact of the matter is this:  when you have no debt, you have more money.  When you have more money, you can actually spend and invest that money (both of which are great for the economy).  If, however, all your money is tied up in debt, you can’t do either of those things.  Avoiding debt will prevent this from happening.

Just ask Discover

While preparing to write this article, I came across an article that was posted from Discover.com.  I thought it was odd that a credit card company might have something to say about why credit cards are bad, so I had to read it (I couldn’t help myself).

The article actually said that debt could hurt the economy; I was a little surprised when I read it. If you want to read the whole article, you can do so here. If not, allow me to share with you the part that I found most interesting:

When cardholders incur too much debt, they end up having less spending ability, which can hurt the economy.  Credit card users who carry a balance must also pay interest charges, which can ultimately reduce their ability to make new purchases.

I couldn’t have said it better myself.  If a credit card company readily admits that “too much debt can hurt the economy,” we ought to take that pretty seriously, I think.

The fact is that too much debt will hurt the economy. I can’t imagine why anyone would want to risk that.  It’s so easy for credit card debt to get out of control, and when it does it’s not at all good for the economy.

Bottom line

When you use credit cards, you artificially increase demand, which then increases price.  Basically, this causes the cost of living to go up, which is known as inflation; this is not a good thing for the economy.

When you use credit cards you incur debt, which limits your spending ability.  Mix that with having to pay interest, and now you have even less spending ability.  Even Discover said that was bad for the economy; what more needs to be said?