The Credit Card and The Growing Impact of the Economy

A credit card is a card that enables a holder to purchase goods and services based on a promise to pay for them. As such, a credit card forms a part of payments system through which individuals can buy products based on promises to pay. The issuer of the card, usually a bank, gives a line of credit to the holder of the card and from this line, a holder can borrow money to pay for goods and services or as cash advance. A holder of a credit card is able to revolve his or her balance but at the cost of certain pre-established interest. In order to get a credit card from a local bank or a credit union, a user is required to open an account with the bank or union in question after which the bank approves the account and then issues out a credit card. Today, many consumers in many countries are able to pay for their purchases using credit cards. In fact, the level of consumption has increased in many countries over a period of time despite the fact that this trend may and already has in some countries shifted negatively with consumers rethinking their reliance on credit cards.

 If and when a user purchases goods or services using the card, he agrees to pay back the issuer of the card. In this regard, the holder of a credit card indicates the consent to pay by signing a certain receipt which records the details of the card besides indicating the amount to be paid out. The card holder may also give consent through a personal identification number while at the same time sellers may accept verbal authorization thorough the existing means of communication (Jinkook, 2002, p. 234).

Credit cards are useful in the economy but may also proof to be pretty disastrous to such an economy. Many countries especially the US have witnessed an increase in the usage of credit cards in the economy. More developed countries have fully embraced the use of credit cards but developing countries are just beginning to incorporate credit cards in their economy. While transactions in the economy can be done faster and more easily through credit cards, many other negative effects such as increased money supply can result and which may distort the policies set to uphold the status of the economy.

Increased use of credit cards is beneficial to customers in that they enable them to buy and pay for their goods and services with ease and at a relatively short period of time. As such, the customers get access to many goods and services. Increased competition among financial institutions offering credit card services results to low interest rates among other benefits. Increased use of credit cards in the economy triggers low interests rates though such rates are charged for a limited time after which the usual rates apply.

However, customers are often informed when the low interest rate period is coming to an end thus are kept prepared for the high interest rate period. To business merchants, credit card payment system offers secure means of payment as compared to other methods of payment including checks. This is because the bank or the issuer of the credit card commit to pay the seller immediately the holder authorizes the transaction even if the customer defaults to pay his credits to the bank. The cards also discourage thefts by reducing the amount of cash that a merchant holds in his business premises. In this regard, credit cards are often considered to be secure than cash (John, 1995, 123).

Credit cards increases the revenues earned by banks and merchants but they also come with a certain cost to all the parties involved. Institutions offering credit card services charge a given interest rate to their customer while merchants experience an increase in the level of their sales. It offers a best and more affordable way of financing an entrepreneurship thus increases investments in an economy. Individuals are able to buy assets necessary for starting a business which if successful can be associated with many other benefits in the economy including employment opportunities and increased production.

However, banks rely on the assumption that the credit holders will not default in repaying their credits. As such, if a card holder defaults on paying back, the institution will have to bear the associated costs of recovering the money while sometimes it have even proved impossible to do so. On the other hand, credit extended to customers is often gotten from other financial institutions which also require to be paid back with an interest. The cost of maintaining the credit card system also comes with a cost to the bank besides those costs associated with rewards such as gifts certificates and frequent flier points offered to the customers (Lendol, 1999, p. 65).

Still, credits cards are associated with many types of frauds some of which are noticed or identified very late for the bank or credit union to take the appropriate action. Increased use and understanding of information technology and its application have increased cases of frauds more so over the internet where individuals still personal information from merchants and other sources in an effort to still money from credit card holders. Merchants have also at times faced fraud cases from individuals other than the recognized card owners presents credit cards to buy goods and services.

As the growth of economies in many countries especially in US slows down, lenders are starting to cast their doubts about credit cards. Increased credit payment defaults in many economies are forcing many banks and other lending institution to face losses in their operations. For example, banks in the US economy have undergone a loss estimated at twenty one billion dollars arising from bad credit card loans. In countering these losses, banks and other financial institutions tend to lower the credit limits of their customers. By extension, this presents problems to the customers especially when it comes to credit score used by customers in securing loans from this financial institutions.

In this context, customers end up having a low credit score impairing their capability to borrow money for investments and other uses. Following this, it is true that the shorter effects of credit cards in an economy are beneficial while long term effects are not possible to determine. Increase usage of credit cards can be beneficial or destructive to an economy depending on various factors such as employment and mortgage crisis as is evident in the US economy today (Klein, 1999, p. 92).

In essence, increased use of credit cards in a healthy economy would have long term beneficial effects on such an economy. Economic productivity would increase and consumers will have improved living standards. As such, this would further increase the production capacity of the economy. As stated earlier, credit cards have proved to be useful in financing business enterprises through purchase of important operational assets. Assets such as office equipment can be easily obtained through credits borrowed through credit cards. If such a situation is experienced in an economy, the level of investment will increase significantly and other benefits will follow. Employment opportunities will increase while savings from established investments will increase further strengthening the economy.

Payment of important services such as catering for ones education have proved easy through credit cards system with students finding it easy to pay for their tuition fees and other expenses encountered in the process. Affordability of services and important products has greatly changed the living standards of many citizens in many countries thereby increasing their productivity and nurturing future production resources.

However, in an economy facing unprecedented changes such as housing crisis experienced in the US economy and the evident slow growth of the economy, increased use of credit cards can have negative impacts on the long term status of the economy and may be costly not only to consumers and their lenders but also to the government as a whole. For one, increased use of credit cards increases the amount of money circulating in an economy.

Increased money supply will result to an increased rate of inflation in the economy. Consequently, individuals will spend more and more on basic goods and services further resulting to a decrease in consumers’ real income. This can further translate to other negative impact including increased unemployment levels and low economic production capacity. Individuals will be seeking high paying jobs and employment opportunities to cater for the increase in the prices of goods and services. Unemployment level will further increase and the production capacity of the economy will go down. This can further result to a crisis in the economy in terms of economic recessions among other things (Robert, 1994, p. 76).

While it is true that capital is important in upholding economic production, individuals are in most cases incapable of drawing capital from their savings to cater for their direct investments. They seek capital from banks and other financial institutions in form of loans. Credit cards can be understood in the same way individuals secure loans for direct investments. Low interest rates will encourage consumers to increasingly use credit cards in their purchases while at the same time triggering a  high rate of competition in regard to banks and credit unions offering credit cards services (William, 2003, p. 78).

Increased competition will itself translate to even lower interest rates thus further increasing borrowing by the consumers. If this trend persists, money supply will increase in the economy and measures will have to be deployed to counter the negative effects of such an increase. Policies to increase the rate of interest charged on credit cards will have to be developed and implemented in an effort to discourage borrowing and reliance on credit cards while at the same time trying to call back some of the money in the economy to the central bank. Consumers will then find it increasingly impossible to afford some of the goods and products that were affordable previously as cash payment methods will tend to replace the older system of credit cards. Banks will increase their interest rates and this will affect the credit scores of many consumers even those who are capable of repaying their loans. In essence, future borrowing for the customers will decrease and this can further bring about a reduction in the level of investment and savings in the economy as consumers’ real income will be low (Klein, 1999, p. 97).

Another danger posed by increased use of credit cards in an economy is the possibility of a financial crisis with banks finding it hard to finance their credits obtained to sustain credit cards system. As is evident in the American economy which is facing slow growth and increased unemployment, banks and other financial institutions will face losses while some institutions will collapse altogether due to an increase in the usage of credit cards and if proper actions are not taken by the policy makers. As stated earlier, banks in US are estimated to make losses amounting to twenty one billion dollars given the housing crisis that has hit the economy for past few months and which has made many consumers to default in paying their loans.

Default to pay loans presents another problem in an economy characterized by increase availability and usage of credit cards. As stated earlier in the discussion, banks rely on other forms of lending to support credit cards system besides the assumption that their customers will be able to repay back their loans. While it is true that some financial institutions require a consumer to deposit a certain percentage of the credit desired with the institution in question, it is also true that some banks extended credits without such a requirement while others offers relatively flexible requirements in an effort to compete with others in the market.

Further, banks are also required to repay their debts with a certain interest not considering the expenses involved in upholding credit card system. Evidence has shown that some customers default in repaying their credits making the banks to undergo many expenses in shouldering the costs associated with such a default (David, 1991, p. 46).

It has also been established that banks encounter losses as a result of fraud cases. All this negative impact brought to the banks and other financial institutions by the credit cards systems will be reflected to the economy in the long run. A financial crisis which will further discourage borrowing and investment will negatively affect many economic sectors and the consequence will be an overall reduction in the economic productivity.

The impacts of credit card system in any economy are dependent on how such an economy is doing. Credit cards system can be very useful in boosting the growth and productivity of an economy but may prove otherwise in the long run. Reduced consumer spending in the long run and resulting from increased bank interest rates will affect the economy in that supply of good and services will surpass the supply of the same. In the end, producers will be forced to cut down their production capacity to counter the reduced market demand. In the end the overall production capacity of the economy will reduce further bringing about other economic issues such as unemployment and inflation. This will further slow down the rate of economic growth demanding policy makers to restructure and redesign the policies adopted.

Unemployment can increase the level of poverty in the economy in that it characterizes reduced savings and investments levels. Fraud cases will bring about emergence of black markets in which credit cards information is stolen and quickly used. Consumers will be faced with low real incomes to cater for their needs thus an overall negative shift in their consumption trends. In an economy with many crises, increased use of credit cards will further strengthen the crisis in the long run (Charles, 2001, p. 68).

In conclusion, it is true to say that over the last few years, many countries have embraced the credit card system as a means of payments and have differently reaped the benefits associated with this payment method. It is also true to say that some of these countries have economically suffered as a result of increased lending made through credit cards. While credit cards can be view as means of payments, they must in any case be understood in terms of means of obtaining credit from banks and other financial institutions. A healthy economy is more likely to enjoy the positive impacts of credit card system and successfully be able to deal or to counter the negative impacts of the same.

On the other hand, a reduction in the rate of economic growth in a country will imply that the rate of returns to business and financial enterprises will fall and the result will be an increased rate of interest to discourage borrowing whether direct or through credit cards. Other negative factors such as repayment defaults will further accelerate and increase the negative impacts brought about by credit cards borrowing.

References:

Charles Morrow (2001). Common sense credit: Credit unions come of age. London, Routledge, p. 98

David M. T. (1991). The decline of thrift in America: Our cultural shift from saving to spending. Westport CT, Praeger Publishers, p. 46

Jinkook L. (2002). Consumers’ use of credit cards: Store credit card usage as an alternative payment and financing medium. Journal of Consumer Affairs, Vol. 36, p. 234 

John V. D. (1995). Credit cards and money demand: A cross sectional study. Journal of Money, Credit and Banking, Vol. 27, p. 123

Klein Lloyd (1999). It’s in the cards: Consumer credit and the American experience. Westport CT, Praeger Publishers, p. 92, 97

Lendol Calder (1999). Financing the American dream: A cultural history of consumer Credit. Princeton, Princeton University Press, p. 65

Robert Guttmann (1994). How credit money shapes the economy: The united States in the global system. London, Routledge, p. 76

William R.. (2003). Who pays for credit cards? Journal of Consumer Affairs, Vol. 37, p. 78