Credit Card Debt & its Effect on the Economy

Credit Card Debt & its Effect on the Economy
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The economy relies heavily on consumer spending, which often requires people to borrow and go into debt. That system cannot sustain itself if borrowers keep getting poorer from credit card debt. Responsible credit card debt is good for the economy because it means healthy spending is occurring. But when the scales tip toward no one using credit, or toward too many people in debt they can’t pay back, the economy suffers.

No Credit Card Debt

It’s difficult to imagine the U.S. economy functioning with no one owing any credit card debt. But that’s the scenario John W. Schoen, financial writer and senior producer for MSNBC, considered. Though Americans being and staying debt free is unlikely to happen anytime soon, if ever, it’s interesting to note what effects would occur. Consumer spending supports more than two-thirds of the U.S. economy, as of publication. If people stopped spending, it would lead to a drastic decline in the gross domestic product, which is typically used as an indicator of an economy’s health and standard of living.

A Rise in Unemployment

Credit cards give people the power to spend. If people stopped spending, unemployment would rise. Millions of jobs would become unnecessary if people weren’t consuming. People directly involved in manufacturing and selling goods and services would suffer, and the folks who make boxes to package products would lose jobs, as would the people who deliver goods. Many lenders would go out of business if Americans became debt-free. In addition, an economy without reliable lenders “wouldn’t get very far,” Schoen says.

Use of Credit for Daily Living Expenses

When people begin to use credit cards to meet necessary living requirements instead of simply using them for entertainment, dining out, beauty services and shopping online, this indicates a troubled economy. Credit card debt rose by 17.1 billion in May 2012 from April 2012, according to the Federal Reserve and reported by “The New York Times.” Combining increased credit card spending with a dip in consumer confidence and a high unemployment rate as was the case in May 2012 indicates people are struggling to make ends meet and are taking on high-interest debt to get them through. The likelihood for a rise in credit card default rates increases under these circumstances.

Growth Stops

Debt can sustain an economy, but growth eventually stops when households operate at a loss. When people cannot afford to pay back their credit cards, they need to reduce their standard of living. This is bad for the economy and can lead to periods of recession. A recession hurts the economy: The government takes in less money from taxes because of higher unemployment. The government then needs to spend more on unemployment benefits. Markets around the world might worry about too much government borrowing, which could lead to a devalued U.S. dollar.