Credit cards had an important impact on the stability of our economy. The debt creates a growth in consumer spending by providing people with extra funds to spend on services and goods. This situation has a positive impact on the financial markets since far more money is being circulated. However, this benefit of debt has only a short-term advantage. When people reach the credit limits, they may no longer make purchases. Moreover, they have to spend their funds on paying off interest and principal, leaving card holders with less money to spend on commodities (Alvaro).
Investors who buy stock in lending institutions that fund defaulted credit cards lose their money when borrowers appear to be not capable to pay. Reducing sales in these areas cause extra job losses. Higher degrees of debt can result in the lower levels of debt utilized for investments (Collinson, 2011). If an individual has monthly expensive credit card payments he or she is less likely to put aside some capital to put it in real estate. This may transfer demand in the economy from spheres of financial services to consumption-driven spheres like fast food and entertainment. Also when individuals can’t cover basic expenses or medical bills, they have to rely on public services and this situation puts another burden on the government infrastructures.
Financial institutions and banks that suffer from losses are the result of credit card defaults cut back on lending. Additionally to the complexity of individuals receiving access to money in the shape of credit cards, businesses find it hard to borrow money as well.
The banks are relying on borrowers to pay back the debts (Smith, 2011). If the bank does not really care who it gives money to or the credit card holders have no chance to give money back, the bank has a problem. The bank may be even required to leave the business. In case if this were to happen to all banks in the state simultaneously, the total financial system of our country would collapse.
Alvaro, Billy. “Credit Card Debt: the Effects and the Solution.“ Streetdirectory.com. Web. 11 February 2012.
Smith, Brandon. “The Worst 4 Letter Word of All–Debt.” Usawatchdog.com. 9 February 2011. Web. 11 February 2012.
Collinson, Patrick. “The stock market crash: how it affects you.” Guardian.co.uk. 5 August 2011. Web. 11 February 2012.