Recessions typically arise from a number of factors, and credit cards may certainly be one of those factors. Credit cards could have contributed to the recession either directly or indirectly, but they may also be useful during times of a depressed economy to help keep your own finances alive.
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Recessions don’t happen overnight. The issues that were brewing to create the recession have been brewing for years, including those issues related to credit cards.
Credit Cards Increase Consumer Debt
Credit cards may have directly played a part in the recession by being a tool that helped increase consumer debt. Consumer debt is the underlying cause of the recession, according to an article published by Washington University.
People have been spending over their limits and digging themselves into debt for decades, the article says, although it has worked to help the economy by boosting business is the past. Instead of being boosted this time around, however, the economy fell flat, thanks to household debts that people could no longer afford to repay. The housing bubble burst.
Household debt spiraled even deeper, but the usual credit that saved people in the past was no longer there to rescue them. Credit card offers trickled off, interest rates could go no lower, and even the banks found themselves hurting.
Rather than budgeting to meet their reduced income, people could easily use existing credit cards to keep spending indefinitely without the means to pay it back. Job loss helped ensure household debts were tougher to pay back due to loss or reduced income. Yet people could still keep using their credit cards.
The flipside of the scenario may have also played a part in the recession. Those that stopped using their credit cards to pay for things they could ill-afford were no longer pouring money into the economy, making it weaker and mired in an indefinite downturn.
Not All Credit Card Debt is to Blame
Not all credit card use was part of the recession cause, the Seeking Alpha financial website explains. Good credit is OK; bad credit is to blame. Credit cards may have played a role in the recession by being so readily available to nearly everyone, regardless if they had the means to pay off their bills or not.
The site says all heck broke loose when the debt and loans kept piling up and remained unpaid. Unpaid debts made prices dip and created fertile ground for a recession to kick in. The article further explains how consumer debt actually supports the economy by matching the gross domestic product, or GDP. If the amount of outstanding credit matches the GDP then the country’s economy remains stable. When the amount of outstanding credit starts to increase far beyond the GDP, the economy tanks and we enter a recession.
The amount of outstanding credit and GDP were close if not matching exactly from 1954 to 1984, Seeking Alpha says, but unpaid credit began to overshadow GDP. The amount of unpaid credit was $11 trillion higher than GDP by 2007, the article continues, and hence the recession was born. Unproductive debt may be the key to the mess.
Credit Cards as Permanent Financing
Bad credit can easily pile up when people begin to look at credit cards as a way to indefinitely finance their lives instead of a tool to help them balance their budget, Seeking Alpha explains. When real estate values were in their heyday, some homeowners took that as a sign that they had plenty of money and could use credit cards and financing from home equity loans with abandon for frivolous spending. With home values so high, they may have thought they would certainly have the means to pay it back.
Then the housing bubble burst. Real estate values plunged but people were still stuck with bad credit and plenty of unmanageable credit card debt they no longer had the promise of paying off.
Credit Cards’ Indirect Contribution to the Recession
Greed and excessive living are to blame for the recession, retired newsman Tom Brokaw said in a commencement speech to University of South Carolina graduates quoted on The State newspaper’s website. Greed and excessive living, in turn can both be fueled by credit cards.
Credit cards may give some the false hope of easy money, instant gratification and obtaining things they want, rather than need, with a quick swipe of the magnetic strip.
This type of credit card spending is rarely a wise idea, although you can still be wise with credit cards even in the depths of an economic downturn.
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